<PAGE>
As filed with the Securities and Exchange Commission on July 20, 2000
Securities Act Registration No. 33-9269
Investment Company Act Registration No. 811-4864
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [_]
Pre-Effective Amendment No. [_]
[X]
Post-Effective Amendment No. 22
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [_]
[X]
Amendment No. 22
(Check appropriate box or boxes)
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PRUDENTIAL EQUITY INCOME FUND
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (973) 367-7525
Marguerite E.H. Morrison
Gateway Center Three
100 Mulberry Street
Newark, New Jersey 07102-4077
(Name and Address of Agent for Service)
Approximate date of proposed public offering:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[X] on September 18, 2000 pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[_] this post-effective amendment designates a new
effective date for a previously filed post-
effective amendment
Title of Securities Being Registered . . . . Shares of beneficial interest,
par value $.01 per share.
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<PAGE>
[LOGO]
FUND TYPE:
STOCK
INVESTMENT OBJECTIVE:
CAPITAL APPRECIATION
PRUDENTIAL VALUE FUND
PROSPECTUS: SEPTEMBER _, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Fund's shares, nor has the SEC determined that this
prospectus is complete or accurate. It is a criminal offense to state otherwise.
[LOGO] PRUDENTIAL INVESTMENTS
<PAGE>
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Table of Contents
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<TABLE>
<C> <S>
1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
5 How the Fund Invests
5 Investment Objective and Policies
5 Other Investments and Strategies
9 Investment Risks
12 How the Fund is Managed
12 Board of Trustees
12 Manager
12 Investment Adviser
12 Portfolio Manager
13 Distributor
14 Fund Distributions and Tax Issues
14 Distributions
15 Tax Issues
16 If You Sell or Exchange Your Shares
18 How to Buy, Sell and Exchange Shares of the Fund
18 How to Buy Shares
26 How to Sell Your Shares
29 How to Exchange Your Shares
31 Telephone Redemptions or Exchanges
32 Financial Highlights
33 Class A Shares
34 Class B Shares
35 Class C Shares
36 Class Z Shares
37 The Prudential Mutual Fund Family
For More Information (Back Cover)
</TABLE>
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Prudential Value Fund
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Risk/Return Summary
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This section highlights key information about the Prudential Value Fund
(formerly known as Prudential Equity Income Fund), which we refer to as "the
Fund." Additional information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is capital appreciation. This means we seek
investments whose price will increase. We normally invest at least 65% of the
Fund's total assets in the common stock and convertible securities of companies
that we believe will provide investment returns above those of the Standard &
Poor's 500 Composite Stock Price Index or the New York Stock Exchange (NYSE)
Composite Index. We also may use derivatives for hedging or to improve the
Fund's returns.
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We're Value Investors
In deciding which stocks to buy, we use what is known as a value investment
style. That is, we invest in stocks that we believe are undervalued, given the
company's sales, book value and cash flow. We consider selling a security if it
has increased in value to the point where we no longer consider it to be
undervalued.
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While we make every effort to achieve our objectives, we can't guarantee
success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since we invest
primarily in common stock, there is the risk that the price of a particular
stock we own could go down. Stock markets are volatile.
In addition to an individual stock losing value, the value of the equity
markets or a sector of them could go down. The Fund's holdings can vary from
broad market indexes, and performance of the Fund can deviate from the
performance of such indexes.
Some of our investment strategies--such as using derivatives--involve above-
average risks. The Fund may use risk management techniques to try to preserve
assets or enhance return. Derivatives may not fully offset the underlying
positions and this could result in losses to the Fund that would not otherwise
have occurred.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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1
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Risk/Return Summary
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EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation for the last 10 years. The bar chart and table below demonstrate the
risk of investing in the Fund by showing how returns can change from year to
year and by showing how the Fund's average annual total returns compare with a
stock index and a group of similar mutual funds. Past performance does not mean
that the Fund will achieve similar results in the future.
[GRAPH]
Annual Returns* (Class B shares)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
-5.73% 25.62% 8.42% 20.43% -0.80% 20.72% 20.98% 35.35% -3.57% 10.74%
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BEST QUARTER: 16.24% (2nd quarter of 1997)
WORST QUARTER: -18.25% (3rd quarter of 1998)
* These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown. The total
return of the Class B shares for the six months ended 6-30-00 was -6.31%.
Average Annual Returns/1/ (as of 12-31-99)
<TABLE>
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<CAPTION>
1 YR 5 YRS 10 YRS SINCE INCEPTION
<S> <C> <C> <C> <C>
Class A shares 6.05% 15.78% N/A 13.42% (since 1-22-90)
Class B shares 5.74% 16.01% 12.47% 11.71% (since 1-22-87)
Class C shares 8.63% 15.88% N/A 13.89% (since 8-1-94)
Class Z shares 11.91% N/A N/A 15.38% (since 3-1-96)
S&P 500/2/ 21.03% 25.54% 19.36% N/A/2/
Lipper Average/3/ 4.56% 17.83% 13.46% N/A/3/
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</TABLE>
1 The Fund's returns are after deduction of sales charges and expenses. Without
the distribution and service (12b-1) fee waiver for Class A shares, the
returns would have been lower.
2 The Standard & Poor's 500 Composite Stock Price Index (S&P 500)--an unmanaged
index of 500 stocks of large U.S. companies--gives a broad look at how stock
prices have performed. These returns do not include the effect of any sales
charges or operating expenses of a mutual fund. These returns would be lower
if they included the effect of sales charges and operating expenses. S&P 500
returns since the inception of each class are 19.18% for Class A, 16.96% for
Class B, 25.97% for Class C and 26.60% for Class Z shares. Source: Lipper
Inc.
3 The Lipper Average is based on the average return of all mutual funds in the
Lipper Equity Income Fund category and does not include the effect of any
sales charges. Again, these returns would be lower if they included the
effect of sales charges. Lipper returns since the inception of each class are
13.30% for Class A, 11.88% for Class B, 15.61% for Class C and 14.62% for
Class Z shares. Source: Lipper Inc.
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Prudential Value Fund
2
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Risk/Return Summary
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FEES AND EXPENSES
This table shows the sales charges, fees and expenses that you may pay if you
buy and hold shares of each class of the Fund--Class A, B, C and Z. Each share
class has different sales charges--known as loads--and expenses, but represents
an investment in the same fund. Class Z shares are available only to a limited
group of investors. For more information about which share class may be right
for you, see "How to Buy, Sell and Exchange Shares of the Fund."
Shareholder Fees/1/ (paid directly from your investment)
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering price) 5% None 1% None
Maximum deferred sales charge (load)
(as a percentage of the lower of original
purchase price or sale proceeds) None 5%/2/ 1%/3/ None
Maximum sales charge (load) imposed on
reinvested dividends and other
distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
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</TABLE>
Annual Fund Operating Expenses (deducted from Fund assets)
<TABLE>
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<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees .50% .50% .50% .50%
+ Distribution and service (12b-1) fees .30%/4/ 1.00% 1.00% None
+ Other expenses .27% .27% .27% .27%
= Total annual Fund operating expenses 1.07% 1.77% 1.77% .77%
- Fee waiver or expense reimbursement .05% None None None
= Net annual Fund operating expenses 1.02%/4/ 1.77% 1.77% .77%
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</TABLE>
1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.
2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares convert to Class A shares approximately seven years after
purchase.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
4 For the fiscal year ending 10-31-00, the Distributor of the Fund has
contractually agreed to reduce its distribution and service (12b-1) fees for
Class A shares to .25 of 1% of the average daily net assets of the Class A
shares.
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3
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Risk/Return Summary
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Example
This example will help you compare the fees and expenses of the Fund's
different share classes and compare the cost of investing in the Fund with the
cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A shares during
the first year. Although your actual costs may be higher or lower, based on
these assumptions, your costs would be:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $599 $819 $1,056 $1,736
Class B shares $680 $857 $1,059 $1,813
Class C shares $378 $652 $1,050 $2,163
Class Z shares $ 79 $246 $ 428 $ 954
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C>
Class A shares $599 $819 $1,056 $1,736
Class B shares $180 $557 $ 959 $1,813
Class C shares $278 $652 $1,050 $2,163
Class Z shares $ 79 $246 $ 428 $ 954
</TABLE>
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How the Fund Invests
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is capital appreciation. This means we seek
investments whose price will increase. While we make every effort to achieve
our objective, we can't guarantee success.
In pursuing our objective, we normally invest at least 65% of the Fund's
total assets in the common stock and convertible securities of companies that
we believe will provide investment returns above those of the S&P 500 or the
NYSE Composite Index.
We Use a Approach
We buy common stock and convertible securities primarily of large
capitalization companies.
In addition to buying common stock, we may buy convertible securities. These
are securities--like bonds, corporate notes and preferred stocks--that we can
convert into the company's common stock or some other equity security. The Fund
also invests in other equity-related securities, including American Depositary
Receipts (ADRs); nonconvertible preferred stock; warrants and rights that can
be exercised to obtain stock; real estate investment trusts (REITs);
investments in various types of business ventures, including partnerships and
joint ventures; and similar securities. Generally, we consider selling a
security when it has increased in value to the point where it is no longer
undervalued in the opinion of the investment adviser.
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover
page of this prospectus.
The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to try to increase the Fund's returns or protect its
assets if market conditions warrant.
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5
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How the Fund Invests
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Foreign Securities
We may invest up to 30% of the Fund's total assets in foreign securities,
including money market instruments and other fixed-income securities, stock and
other equity-related securities. For purposes of the 30% limit, we do not
consider ADRs and other similar receipts or shares to be foreign securities.
Real Estate Investment Trusts
We may invest in the securities of real estate investment trusts known as
REITs. REITs are like corporations, except that they do not pay income taxes if
they meet certain IRS requirements. However, while REITs themselves do not pay
income taxes, the distributions they make to investors are taxable. REITs
invest primarily in real estate and distribute almost all of their income--most
of which comes from rents, mortgages and gains on sales of property--to
shareholders.
Money Market Instruments, Bonds and Other Fixed-Income Obligations
Under normal circumstances, the Fund may invest up to 35% of its total assets
in money market instruments and other fixed-income obligations. Money market
instruments include the commercial paper of U.S. corporations, short-term
obligations of U.S. banks, certificates of deposit and short-term obligations
issued or guaranteed by the U.S. government or its agencies. Longer-term fixed-
income obligations include bonds and similar debt obligations. Generally,
fixed-income obligations provide a fixed rate of return, but provide less
opportunity for capital appreciation than investing in stocks.
The Fund will only purchase money market instruments in one of the two
highest short-term quality ratings of a major rating service. For bonds and
other long-term fixed-income obligations, we invest primarily in obligations in
one of the top three long-term quality ratings (A or better by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Ratings Group (S&P) or
comparably rated by another major rating service). We may invest in lower-rated
obligations which are speculative, including high-yield or "junk" bonds
(obligations rated below Baa/BBB by Moody's or S&P or comparably rated),
although we will not invest in obligations rated lower than Ca/CC by Moody's or
S&P or comparably rated. We also may invest in obligations that are not rated,
but that we believe are of comparable quality to the obligations described
above.
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How the Fund Invests
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Temporary Defensive Investments
In response to adverse market, economic or political conditions, we may
temporarily invest up to 100% of the Fund's assets in money market instruments.
Investing heavily in these securities limits our ability to achieve capital
appreciation, but can help to preserve the Fund's assets when the equity
markets are unstable.
Repurchase Agreements
The Fund may also use repurchase agreements, where a party agrees to sell a
security to the Fund and then repurchase it at an agreed-upon price at a stated
time. This creates a fixed return for the Fund and is, in effect, a loan by the
Fund. Repurchase agreements are used for cash management purposes.
Derivative Strategies
We may use various derivative strategies to try to improve the Fund's returns.
We may use hedging techniques to try to protect the Fund's assets. We cannot
guarantee that these strategies will work, that the instruments necessary to
implement these strategies will be available or that the Fund will not lose
money. Derivatives--such as futures, options, foreign currency forward
contracts and options on futures--involve costs and can be volatile. With
derivatives, the investment adviser tries to predict whether the underlying
investment--a security, market index, currency, interest rate or some other
benchmark--will go up or down at some future date. We may use derivatives to
try to reduce risk or to increase return consistent with the Fund's overall
investment objectives. The investment adviser will consider other factors (such
as cost) in deciding whether to employ any particular strategy or use any
particular instrument. Any derivatives we use may not match the Fund's
underlying holdings.
Options
The Fund may purchase and sell put and call options on equity securities and
financial indexes traded on U.S. or foreign securities exchanges or in the
over-the-counter market. An option is the right to buy or sell securities in
exchange for a premium. The Fund will sell only covered options.
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7
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How the Fund Invests
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Futures Contracts and Related Options
Foreign Currency Forward Contracts. The Fund may purchase and sell financial
futures contracts and related options on financial futures. A futures contract
is an agreement to buy or sell a set quantity of an underlying product at a
future date, or to make or receive a cash payment based on the value of a
securities index. The Fund also may enter into foreign currency forward
contracts to protect the value of its assets against future changes in the
level of foreign exchange rates. A foreign currency forward contract is an
obligation to buy or sell a given currency on a future date at a set price.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks--Risk Management and Return Enhancement
Strategies."
Additional Strategies
The Fund also follows certain policies when it borrows money (the Fund can
borrow up to 20% of the value of its total assets); lends its securities to
others for cash management purposes (the Fund can lend up to 33% of the value
of its total assets, including collateral received in the transaction); and
holds illiquid securities (the Fund may hold up to 15% of its net assets in
illiquid securities, including securities with legal or contractual
restrictions on resale, those without a readily available market and repurchase
agreements with maturities longer than seven days). The Fund is subject to
certain investment restrictions that are fundamental policies, which means they
cannot be changed without shareholder approval. For more information about
these restrictions, see the SAI.
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How the Fund Invests
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INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other non-principal investments the Fund may make. The
investment types are listed in the order in which they normally will be used by
the portfolio manager. See, too, "Description of the Fund, Its Investments and
Risks" in the SAI.
Investment Type
% of Fund's Total Risks Potential Rewards
Assets
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Common stock and . Individual stocks . Historically,
convertible could lose value stocks have
securities outperformed
. The equity other
At least 65% markets could go investments over
down, resulting the long term
in a decline in
value of the . Generally,
Fund's economic growth
investments means higher
corporate
. Companies that profits, which
pay dividends may leads to an
not do so if they increase in
don't have stock prices,
profits or known as capital
adequate cash appreciation
flow
. May be a source
. Changes in of dividend
economic or income
political
conditions, both
domestic and
international,
may result in a
decline in value
of the Fund's
investments
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. The Fund's . Bonds have
Fixed-income holdings, share generally
obligations price, yield and outperformed
total return may money market
fluctuate in instruments over
Up to 35%; response to bond the long term,
usually less market movements with less risk
than % than stocks
. Credit risk--the
risk that the . Most bonds will
default of an rise in value
issuer would when interest
leave the Fund rates fall
with unpaid
interest or . Regular interest
principal. The income
lower a bond's
quality, the . Investment-grade
higher its bonds have a
potential lower risk of
volatility default than
junk bonds
. Market risk--the
risk that the . Principal and
market value of interest on
an investment may government
move up or down, securities may
sometimes be guaranteed by
the issuing
government
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9
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How the Fund Invests
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Investment Type (cont'd)
% of Fund's Total Risks Potential Rewards
Assets
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Fixed-income rapidly or . High-quality
obligations (cont'd) unpredictably. debt obligations
Market risk may are generally
affect an more secure than
industry, a stocks since
sector or the companies must
market as a whole pay their debts
before they pay
. Interest rate dividends
risk--the risk
that the value of
most bonds will
fall when
interest rates
rise. The longer
a bond's maturity
and the lower its
credit quality,
the more its
value typically
falls. It can
lead to price
volatility
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Foreign . Foreign markets, . Investors can
securities economies and participate in
political systems the growth of
may not be as foreign markets
Up to 30%; stable as in the and companies
usually less U.S. operating in
than % those markets
. Currency risk--
changing values . Changing value
of foreign of foreign
currencies can currencies
cause losses
. Opportunities
. May be less for
liquid than U.S. diversification
stocks and bonds
. Differences in
foreign laws,
accounting
standards, public
information,
custody and
settlement
practices provide
less reliable
information on
foreign
investments and
involve more risk
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Real estate . Performance . Real estate
investment trusts depends on the holdings can
(REITs) strength of real generate good
estate markets, returns from
REIT management rents, rising
Up to 25%; and property market values,
usually less management which etc.
than % can be affected
by many factors, . Greater
including diversification
national and than direct
regional economic ownership
conditions
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How the Fund Invests
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Investment Type (cont'd)
% of Fund's Total Risks Potential Rewards
Assets
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Derivatives . Derivatives such . The Fund could
as futures, make money and
options and protect against
Percentage var- foreign currency losses if the
ies; usually less forward contracts investment
than % that are used for analysis proves
hedging purposes correct
may not fully
offset the . Derivatives that
underlying involve leverage
positions and could generate
this could result substantial
in losses to the gains at low
Fund that would cost
not have
otherwise . One way to
occurred manage the
Fund's
. Derivatives used risk/return
for risk balance is by
management may locking in the
not have the value of an
intended effects investment ahead
and may result in of time
losses or missed
opportunities
. The other party
to a derivatives
contract could
default
. Derivatives that
involve leverage
could magnify
losses
. Certain types of
derivatives
involve costs to
the Fund that can
reduce returns
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Illiquid
securities . May be difficult . May offer a more
to value attractive yield
Up to 15% of net precisely or potential for
assets growth than more
. May be difficult widely traded
to sell at the securities
time or price
desired
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Money market . Limits potential . May preserve the
instruments for capital Fund's assets
appreciation
Up to 35% on a
normal basis and . See credit risk
up to 100% on a and market risk
temporary basis
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11
<PAGE>
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How the Fund is Managed
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BOARD OF TRUSTEES
The Fund's Board of Trustees oversees the actions of the Manager, Investment
Adviser and Distributor and decides on general policies. The Board also
oversees the Fund's officers, who conduct and supervise the daily business
operations of the Fund.
MANAGER
Prudential Investments Fund Management LLC (PIFM)
Gateway Center Three, 100 Mulberry Street
Newark, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended October 31, 1999, the Fund paid PIFM management fees of .51% of the
Fund's average net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of August 31, 2000, PIFM served as the
manager to all of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $ billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.
PORTFOLIO MANAGER
Thomas Kolefas, CFA, a Managing Director of Prudential Investments, began
managing the Fund in May 2000. Mr. Kolefas was previously employed by Loomis
Sayles & Co., L.P., where he was a senior portfolio manager and led a team
managing large- and mid-cap value equity assets, including mutual fund
portfolios, for four years. Prior to 1996, Mr. Kolefas was employed by Mackay
Shields Financial as a portfolio manager for five
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How the Fund is Managed
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years. He earned a B.S. and an M.B.A. from New York University. He also holds a
Chartered Financial Analyst (CFA) designation.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing
the Fund's Class A, B, C and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" tables.
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Fund Distributions and Tax Issues
--------------------------------------------------------------------------------
Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes dividends of ordinary income and any
realized net capital gains to shareholders. These distributions are subject to
taxes, unless you hold your shares in a 401(k) plan, an Individual Retirement
Account (IRA) or some other qualified tax-deferred plan or account. Dividends
and distributions from the Fund also may be subject to state and local income
tax in the state where you live.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit, again unless you hold your
shares in a qualified tax-deferred plan or account.
The following briefly discusses some of the important federal tax issues you
should be aware of, but is not meant to be tax advice. For tax advice, please
speak with your tax adviser.
DISTRIBUTIONS
The Fund distributes dividends of any net investment income to shareholders--
typically every quarter. For example, if the Fund owns ACME Corp. stock and the
stock pays a dividend, the Fund will pay out a portion of this dividend to its
shareholders, assuming the Fund's income is more than its costs and expenses.
The dividends you receive from the Fund will be taxed as ordinary income,
whether or not they are reinvested in the Fund.
The Fund also distributes realized net capital gains to shareholders--
typically once a year. Capital gains are generated when the Fund sells its
assets for a profit. For example, if the Fund bought 100 shares of ACME Corp.
stock for a total of $1,000 and more than one year later sold the shares for a
total of $1,500, the Fund has net long-term capital gains of $500, which it
will pass on to shareholders (assuming the Fund's total gains are greater than
any losses it may have). Capital gains are taxed differently depending on how
long the Fund holds the security--if a security is held more than one year
before it is sold, long-term capital gains are taxed at the rate of 20%, but if
the security is held one year or less, short-term capital gains are taxed at
ordinary income rates of up to 39.6%. Different rates apply to corporate
shareholders.
For your convenience, Fund distributions of dividends and capital gains are
automatically reinvested in the Fund without any sales charge. If you ask us to
pay the distributions in cash, we will send you a check if your account is with
the Transfer Agent. Otherwise, if your account is with a
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broker, you will receive a credit to your account. Either way, the
distributions may be subject to taxes, unless your shares are held in a
qualified tax-deferred plan or account. For more information about automatic
reinvestment and other shareholder services, see "Step 4: Additional
Shareholder Services" in the next section.
TAX ISSUES
Form 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year. If you own
shares of the Fund as part of a qualified tax-deferred plan or account, your
taxes are deferred, so you will not receive a Form 1099. However, you will
receive a Form 1099 when you take any distributions from your qualified tax-
deferred plan or account.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter
and actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.
Corporate shareholders are eligible for the 70% dividends-received deduction
for certain dividends.
Withholding Taxes
If federal tax law requires you to provide the Fund with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will
withhold and pay to the U.S. Treasury 31% of your distributions and sale
proceeds. Dividends of net investment income and short-term capital gains paid
to a nonresident foreign shareholder generally will be subject to a U.S.
withholding tax of 30%. This rate may be lower, depending on any tax treaty the
U.S. may have with the shareholder's country.
If You Purchase Just Before Record Date
If you buy shares of the Fund just before the record date (the date that
determines who receives the distribution), that distribution will be paid to
you. As explained above, the distribution may be subject to income or capital
gains taxes. You may think you've done well, since you bought shares one day
and soon thereafter received a distribution. That is not so
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because when dividends are paid out, the value of each share of the Fund
decreases by the amount of the dividend to reflect the payout, although this
may not be apparent because the value of each share of the Fund also will be
affected by the market changes, if any. The distribution you receive makes up
for the decrease in share value. However, the timing of your purchase does mean
that part of your investment came back to you as taxable income.
Qualified or Tax-Deferred Retirement Plans
Retirement plans and accounts allow you to defer paying taxes on investment
income and capital gains. Contributions to these plans may also be tax
deductible, although distributions from these plans generally are taxable. In
the case of Roth IRA accounts, contributions are not tax deductible, but
distributions from the plan may be tax-free. Please contact your financial
adviser for information on a variety of Prudential mutual funds that are
suitable for retirement plans offered by Prudential.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have realized a capital
gain, which is subject to tax unless you hold shares in a qualified tax-
deferred plan or account. The amount of tax you pay depends on how long you
owned your shares. If you sell shares of the Fund for a loss, you may have a
capital loss, which you may use to offset certain capital gains you have.
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before
the sale of the shares). If you acquire shares of the Fund and sell your shares
within 90 days, you may not be allowed to include certain charges incurred in
acquiring the shares for purposes of calculating gain or loss realized upon the
sale of the shares.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other
----------------------------------------
+$ CAPITAL GAIN
(taxes owed)
RECEIPTS FROM SALE OR
-$ CAPITAL LOSS
(offset against gain)
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words, it's a "taxable event." Therefore, if the shares you exchanged have
increased in value since you purchased them, you have capital gains, which are
subject to the taxes described above.
Any gain or loss you may have from selling or exchanging Fund shares will not
be reported on Form 1099; however, proceeds from the sale or exchange will be
reported on Form 1099-B. Therefore, unless you hold your shares in a qualified
tax-deferred plan or account, you or your financial adviser should keep track
of the dates on which you buy and sell--or exchange--Fund shares, as well as
the amount of any gain or loss on each transaction. For tax advice, please see
your tax adviser.
Automatic Conversion of Class B Shares
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
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HOW TO BUY SHARES
Step 1: Open an Account
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852 or contact:
Prudential Mutual Fund Services LLC
Attn: Investment Services
P.O. Box 15020
New Brunswick, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
Step 2: Choose a Share Class
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why it is called a Contingent
Deferred Sales Charge, or CDSC), but the operating expenses each year are
higher than Class A share expenses. With Class C shares, you pay a 1% front-end
sales charge and a 1% CDSC if you sell within 18 months of purchase, but the
operating expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees
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. The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
. The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
. Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
Share Class Comparison. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you
are entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount/1/
Minimum amount for $100 $100 $100 None
subsequent purchases/1/
Maximum initial 5% of the public None 1% of the public None
sales charge offering price offering price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge Year 1 5% made within
(CDSC)/2/ Year 2 4% 18 months of
Year 3 3% purchase/2/
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% 1% 1% None
service (12b-1) fees (.25 of 1%
shown as a percentage of currently)
average net assets/3/
</TABLE>
1 The minimum investment requirements do not apply to certain retirement and
employee savings plans and custodial accounts for minors. The minimum initial
and subsequent investment for purchases made through the Automatic Investment
Plan is $50. For more information, see "Additional Shareholder Services-
Automatic Investment Plan."
2 For more information about the CDSC and how it is calculated, see "How to
Sell Your Shares--Contingent Deferred Sales Charge (CDSC)." Class C shares
bought before November 2, 1998 have a 1% CDSC if sold within one year.
3 These distribution fees are paid from the Fund's assets on a continuous
basis. Over time, the fees will increase the cost of your investment and may
cost you more than paying other types of sales charges. The service fee for
Class A, Class B and Class C shares is .25 of 1%. The distribution fee for
Class A shares is limited to .30 of 1% (including the .25 of 1% service fee)
and is .75 of 1% for Class B and Class C shares. For the fiscal year ending
10-31-00, the Distributor of the Fund has contractually agreed to reduce its
distribution and service (12b-1) fees for Class A shares to .25 of 1% of the
average daily net assets of the Class A shares.
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Reducing or Waiving Class A's Initial Sales Charge
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
Increase the Amount of Your Investment. You can reduce Class A's sales charge
by increasing the amount of your investment. This table shows how the sales
charge decreases as the amount of your investment increases.
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.75%
$25,000 to $49,999 4.50% 4.71% 4.25%
$50,000 to $99,999 4.00% 4.17% 3.75%
$100,000 to $249,999 3.25% 3.36% 3.00%
$250,000 to $499,999 2.50% 2.56% 2.40%
$500,000 to $999,999 2.00% 2.04% 1.90%
$1 million and above* None None None
</TABLE>
* If you invest $1 million or more, you can buy only Class A shares, unless you
qualify to buy Class Z shares.
To satisfy the purchase amounts above, you can:
. Invest with an eligible group of related investors
. Buy Class A shares of two or more Prudential mutual funds at the same
time
. Use your Rights of Accumulation, which allow you to combine the current
value of Prudential mutual fund shares you already own with the value of
the shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify for
Rights of Accumulation)
. Sign a Letter of Intent, stating in writing that you or an eligible group
of related investors will purchase a certain amount of shares in the Fund
and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
Benefit Plans. Certain group retirement and savings plans may purchase Class A
shares without the initial sales charge if they meet the required minimum for
amount of assets, average account balance or number of
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eligible employees. For more information about these requirements, call
Prudential at (800) 353-2847.
Mutual Fund Programs. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group
relating to:
. Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades and charges its clients a management, consulting or other fee
for its services, or
. Mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
Other Types of Investors. Other investors pay no sales charge, including
certain officers, employees or agents of Prudential and its affiliates, the
Prudential mutual funds, the subadvisers of the Prudential mutual funds and
registered representatives and employees of brokers that have entered into a
selected dealer agreement with the Distributor. To qualify for a reduction or
waiver of the sales charge, you must notify the Transfer Agent or your broker
at the time of purchase. For more information, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Reduction and Waiver of Initial Sales
Charge--Class A Shares."
Waiving Class C's Initial Sales Charge
Benefit Plans. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
Investment of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the
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purchase is made with money from the redemption of shares of any unaffiliated
investment company, as long as the shares were not held in an account at
Prudential Securities Incorporated (Prudential Securities) or one of its
affiliates. These purchases must be made within 60 days of the redemption. To
qualify for this waiver, you must do one of the following:
. purchase your shares through an account at Prudential Securities,
. purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation, or
. purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any
supporting documents it considers appropriate.
Qualifying for Class Z Shares
Benefit Plans. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
Mutual Fund Programs. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
. Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services, or
. Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of
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shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and
other fees charged by these programs in connection with investing in each
available share class before selecting a share class.
Other Types of Investors. Class Z shares also can be purchased by any of the
following:
. Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option,
. Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund), and
. Prudential, with an investment of $10 million or more.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of
the purchase price for Class C shares and a finder's fee for Class A or Class Z
shares from their own resources based on a percentage of the net asset value of
shares sold or otherwise.
Class B Shares Convert to Class A Shares After Approximately Seven Years
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you received with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--
Conversion Feature--Class B Shares."
Step 3: Understanding the Price You'll Pay
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the net asset value or
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Mutual Fund Shares
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds ACME Corp. stock
in its portfolio and the price of ACME stock goes up, while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.
--------------------------------------------------------------------------------
NAV--is determined by a simple calculation--it's the total value of the Fund
(assets minus liabilities) divided by the total number of shares outstanding.
For example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to check the price of mutual
funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York Time on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on most national holidays and Good Friday. We do not
determine the NAV on days when we have not received any orders to purchase,
sell or exchange Fund shares, or when changes in the value of the Fund's
portfolio do not materially affect the NAV.
What Price Will You Pay for Shares of the Fund?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an
initial sales charge (unless you're entitled to a waiver). For Class B and
Class Z shares, you will pay the NAV next determined after we receive your
order to purchase (remember, there are no up-front sales charges for these
share classes). Your broker may charge you a separate or additional fee for
purchases of shares.
Step 4: Additional Shareholder Services
As a Fund shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--its net investment
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income and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Fund at NAV, without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date
we determine who receives dividends.
Prudential Mutual Fund Services LLC
Attn: Account Maintenance
P.O. Box 1859
Philadelphia, PA 19101
Automatic Investment Plan. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
Retirement Plan Services. Prudential offers a wide variety of retirement plans
for individuals and institutions, including large and small businesses. For
information on IRAs, including Roth IRAs or SEP-IRAs for a one-person business,
please contact your financial adviser. If you are interested in opening a
401(k) or other company-sponsored retirement plan (SIMPLES, SEP plans, Keoghs,
403(b) plans, pension and profit-sharing plans), your financial adviser will
help you determine which retirement plan best meets your needs. Complete
instructions about how to establish and maintain your plan and how to open
accounts for you and your employees will be included in the retirement plan kit
you receive in the mail.
The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. Eligible investors who apply for PruTector coverage after the
initial 6-month enrollment period will need to provide satisfactory evidence of
insurability. This insurance is subject to other restrictions and is not
available in all states.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
Remember, the sale of Class B and Class C shares may be subject to a CDSC.
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Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer
Agent, the Distributor or your broker receives your order to sell. If your
broker holds your shares, your broker must receive your order to sell by
4:15 p.m. New York Time to process the sale on that day. Otherwise contact:
Prudential Mutual Fund Services LLC
Attn: Redemption Services
P.O. Box 1849
Philadelphia, PA 19101
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by
wire, certified check or cashier's check. Your broker may charge you a separate
or additional fee for sales of shares.
Restrictions on Sales
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. As permitted by the
Commission, this may happen during unusual market conditions or emergencies
when the Fund can't determine the value of its assets or sell its holdings. For
more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
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If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business or a
trust and you hold your shares directly with the Transfer Agent, you will need
to have the signature on your sell order signature guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker-dealer or credit union. For more information, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Sale of Shares--Signature Guarantee."
Contingent Deferred Sales Charge (CDSC)
If you sell Class B shares within six years of purchase or Class C shares
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:
. Amounts representing shares you purchased with reinvested dividends and
distributions
. Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
(five years for Class B shares purchased before January 22, 1990) and 18
months for Class C shares (one year for Class C shares purchased before
November 2, 1998)
. Amounts representing the cost of shares held beyond the CDSC period (six
years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.
As we noted before in the "Share Class Comparison" chart, the CDSC for Class
B shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase,
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not on the anniversary date itself. The CDSC is 1% for Class C shares-- which
is applied to shares sold within 18 months of purchase (one year for Class C
shares purchased before November 2, 1998). For both Class B and Class C shares,
the CDSC is calculated based on the lesser of the original purchase price or
the redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase, excluding
any time shares were held in a money market fund.
Waiver of the CDSC--Class B Shares
The CDSC will be waived if the Class B shares are sold:
. After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy,
provided the shares were purchased before the death or disability
. To provide for certain distributions--made without IRS penalty-- from a
tax-deferred retirement plan, IRA or Section 403(b) custodial account
. On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B Shares."
Waiver of the CDSC--Class C Shares
Benefit Plans. The CDSC will be waived for purchases by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
Redemption in Kind
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can
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How to Buy, Sell and
--------------------------------------------------------------------------------
Exchange Shares of the Fund
--------------------------------------------------------------------------------
then give you securities from the Fund's portfolio instead of cash. If you want
to sell the securities for cash, you would have to pay the costs charged by a
broker.
Small Accounts
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your
account. We would do this to minimize the Fund's expenses paid by other
shareholders. We will give you 60 days' notice, during which time you can
purchase additional shares to avoid this action. This involuntary sale does not
apply to shareholders who own their shares as part of a 401(k) plan, an IRA or
some other qualified tax-deferred plan or account.
90-Day Repurchase Privilege
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the same Fund without
paying an initial sales charge. Also, if you paid a CDSC when you redeemed your
shares, we will credit your new account with the appropriate number of shares
to reflect the amount of the CDSC you paid. In order to take advantage of this
one-time privilege, you must notify the Transfer Agent or your broker at the
time of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
Retirement Plans
To sell shares and receive a distribution from a retirement account, call your
broker or the Transfer Agent for a distribution request form. There are special
distribution and income tax withholding requirements for distributions from
retirement plans and you must submit a withholding form with your request to
avoid delay. If your retirement plan account is held for you by your employer
or plan trustee, you must arrange for the distribution request to be signed and
sent by the plan administrator or trustee. For additional information, see the
SAI.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in
certain other Prudential mutual funds--including certain money market funds--if
you satisfy the minimum investment requirements. For example,
--------------------------------------------------------------------------------
29
<PAGE>
How to Buy, Sell and
--------------------------------------------------------------------------------
Exchange Shares of the Fund
--------------------------------------------------------------------------------
you can exchange Class A shares of the Fund for Class A shares of another
Prudential mutual fund, but you can't exchange Class A shares for Class B,
Class C or Class Z shares. Class B and Class C shares may not be exchanged into
money market funds other than Prudential Special Money Market Fund, Inc. After
an exchange, at redemption the CDSC will be calculated from the first day of
the month after initial purchase, excluding any time shares were held in a
money market fund. We may change the terms of the exchange privilege after
giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
Prudential Mutual Fund Services LLC
Attn: Exchange Processing
P.O. Box 8157
Philadelphia, PA 19101
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding periods for
CDSC liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares.
We make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a
"taxable event" for federal income tax purposes. This opinion is not binding on
the IRS.
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How to Buy, Sell and
--------------------------------------------------------------------------------
Exchange Shares of the Fund
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Frequent Trading
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Fund will
have to invest. When, in our opinion, such activity would have a disruptive
effect on portfolio management, the Fund reserves the right to refuse purchase
orders and exchanges into the Fund by any person, group or commonly controlled
account. The decision may be based upon dollar amount, volume and frequency of
trading. The Fund may notify a market timer of rejection of an exchange or
purchase order after the day the order is placed. If the Fund allows a market
timer to trade Fund shares, it may require the market timer to enter into a
written agreement to follow certain procedures and limitations.
TELEPHONE REDEMPTIONS OR EXCHANGES
You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852 before 4:15 p.m. New York time. You will receive a redemption
amount based on that day's NAV.
The Fund's Transfer Agent will record your telephone instructions and
request specific account information before redeeming or exchanging shares. The
Fund will not be liable if it follows instructions that it reasonably believes
are made by the shareholder. If the Fund does not follow reasonable procedures,
it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail.
The telephone redemption or exchange privilege may be modified or terminated
at any time. If this occurs, you will receive a written notice from the Fund.
--------------------------------------------------------------------------------
31
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
The financial highlights will help you evaluate the Fund's financial
performance. The total return in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the annual report and the SAI and are available
upon request. Additional performance information for each share class is
contained in the annual report, which you can receive at no charge.
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<PAGE>
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
CLASS A SHARES
The financial highlights for the six months ended April 30, 2000 are unaudited.
The financial highlights for the three years ended October 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended October 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
Class A Shares
Six Months Year Year Year Year Year
Ended 4-30- Ended Ended Ended Ended Ended
Per Share Operating 2000 10-31 10-31 10-31 10-31 10-31
Performance (unaudited) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.12 $18.63 $21.00 $15.43 $14.40 $14.03
Income from investment
operations:
Net investment income .19 .33 .45 .45 .47 .48
Net realized and
unrealized gain (loss)
on investment
transactions .24 .58 (.49) 6.29 1.75 .95
Total from investment
operations .43 .91 (.04) 6.74 2.22 1.43
---------------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment income (.16) (.33) (.44) (.43) (.49) (.54)
Dividends in excess of
net investment income -- (.03) -- -- -- --
Distributions from net
realized gains (2.18) (1.06) (1.89) (.74) (.70) (.52)
Total distributions (2.34) (1.42) (2.33) (1.17) (1.19) (1.06)
Net asset value, end of
period $16.21 $18.12 $18.63 $21.00 $15.43 $14.40
Total return/1/ 2.54% 5.03% (.65)% 45.68% 15.97% 11.15%
<CAPTION>
Six Months Year Year Year Year Year
Ended 4-30- Ended Ended Ended Ended Ended
2000 10-31 10-31 10-31 10-31 10-31
Ratios/Supplemental Data (unaudited) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net assets, end of
period (000) $535,090 $619,469 $638,547 $570,146 $341,717 $276,990
Average net assets (000) $570,387 $653,798 $655,776 $454,892 $310,335 $236,688
Ratios to average net
assets:
Expenses, including
distribution fees/2/ 1.14%/3/ 1.02% .91% .94% .98% 1.03%
Expenses, excluding
distribution fees .89%/3/ .77% .66% .69% .73% .78%
Net investment income 2.20%/3/ 1.71% 2.19% 2.32% 3.26% 3.36%
Portfolio turnover 24% 17% 22% 36% 36% 74%
</TABLE>
--------------------------------------------------------------------------------
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods of less than a full year is not
annualized.
2 The Distributor of the Fund agreed to limit its distribution fees to .25 of
1% of the average daily net assets of the Class A shares.
3 Annualized.
--------------------------------------------------------------------------------
33
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
CLASS B SHARES
The financial highlights for the six months ended April 30, 2000 are unaudited.
The financial highlights for the three years ended October 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended October 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
Class B Shares
Six Months Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
Per Share Operating 4-30-2000 10-31 10-31 10-31 10-31 10-31
Performance (unaudited) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 18.06 $18.57 $20.93 $15.39 $14.36 $14.00
Income from investment
operations:
Net investment income .13 .19 .29 .29 .39 .37
Net realized and
unrealized gain (loss)
on investment
transactions .24 .58 (.48) 6.29 1.71 .95
Total from investment
operations .37 .77 (.19) 6.58 2.10 1.32
---------------------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment income (.10) (.19) (.28) (.30) (.37) (.44)
Dividends in excess of
net investment income -- (.03) -- -- -- --
Distributions from net
realized gains (2.18) (1.06) (1.89) (.74) (.70) (.52)
Total distributions (2.28) (1.28) (2.17) (1.04) (1.07) (.96)
Net asset value, end of
period $ 16.15 $18.06 $18.57 $20.93 $15.39 $14.36
Total return/1/ 2.17% 4.25% (1.35)% 44.60% 15.12% 10.29%
<CAPTION>
Six Months Year Year Year Year Year
Ended 4-30- Ended Ended Ended Ended Ended
2000 10-31 10-31 10-31 10-31 10-31
Ratios/Supplemental Data (unaudited) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net assets, end of
period (000) $756,586 $1,006,346 $1,299,962 $1,250,216 $929,948 $906,793
Average net assets (000) $866,405 $1,200,663 $1,391,826 $1,072,118 $951,220 $911,856
Ratios to average net
assets:
Expenses, including
distribution fees 1.89%/2/ 1.77% 1.66% 1.69% 1.73% 1.78%
Expenses, excluding
distribution fees .89%/2/ .77% .66% .69% .73% .78%
Net investment income 1.45%/2/ .98% 1.44% 1.60% 2.51% 2.66%
Portfolio turnover 24% 17% 22% 36% 36% 74%
</TABLE>
--------------------------------------------------------------------------------
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods of less than a full year is not
annualized.
2 Annualized.
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<PAGE>
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
CLASS C SHARES
The financial highlights for the six months ended April 30, 2000 are unaudited.
The financial highlights for the three years ended October 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the two years ended October 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
Class C Shares
Six Months Year Year Year Year Year
Ended 4-30- Ended Ended Ended Ended Ended
Per Share Operating 2000 10-31 10-31 10-31 10-31 10-31
Performance (unaudited) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $18.06 $18.57 $20.93 $15.39 $14.36 $14.00
Income from investment
operations:
Net investment income .12 .19 .30 .37 .38 .40
Net realized and
unrealized gain (loss)
on investment
transactions .25 .58 (.49) 6.21 1.72 .92
Total from investment
operations .37 .77 (.19) 6.58 2.10 1.32
--------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment income (.10) (.19) (.28) (.30) (.37) (.44)
Dividends in excess of
net investment income -- (.03) -- -- -- --
Distributions from net
realized gains (2.18) (1.06) (1.89) (.74) (.70) (.52)
Total distributions (2.28) (1.28) (2.17) (1.04) (1.07) (.96)
Net asset value, end of
period $16.15 $18.06 $18.57 $20.93 $15.39 $14.36
Total return/1/ 2.17% 4.25% (1.35)% 44.60% 15.12% 10.29%
<CAPTION>
Six Months Year Year Year Year Year
Ended 4-30- Ended Ended Ended Ended Ended
2000 10-31 10-31 10-31 10-31 10-31
Ratios/Supplemental Data (unaudited) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net assets, end of
period (000) $25,969 $33,685 $37,988 $17,911 $8,511 $4,586
Average net assets (000) $29,329 $36,981 $31,345 $11,432 $6,730 $3,132
Ratios to average net
assets:
Expenses, including
distribution fees 1.89%/2/ 1.77% 1.66% 1.69% 1.73% 1.78%
Expenses, excluding
distribution fees .89%/2/ .77% .66% .69% .73% .78%
Net investment income 1.45%/2/ .98% 1.47% 1.53% 2.51% 2.57%
Portfolio turnover 24% 17% 22% 36% 36% 74%
</TABLE>
--------------------------------------------------------------------------------
1 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each period
reported. Total return for periods of less than a full year is not
annualized.
2 Annualized.
--------------------------------------------------------------------------------
35
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
CLASS Z SHARES
The financial highlights for the six months ended April 30, 2000 are unaudited.
The financial highlights for the three years ended October 31, 1999 were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the period from March 1, 1996 through October 31, 1996
were audited by other independent auditors, whose reports were unqualified.
<TABLE>
<CAPTION>
Class Z Shares
Six Months Year Year Year Year
Ended 4-30- Ended Ended Ended Ended
Per Share Operating 2000 10-31 10-31 10-31 10-31
Performance (unaudited) 1999 1998 1997 1996/1/
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of period $18.13 $18.64 $21.00 $15.42 $15.13
Income from investment
operations:
Net investment income .20 .38 .52 .36 .38
Net realized and
unrealized gain (loss) on
investment transactions .26 .58 (.51) 6.43 .30
Total from investment
operations .46 .96 .01 6.79 .68
-------------------------------------------------------------------------------
Less distributions:
Dividends from net
investment income (.18) (.38) (.48) (.47) (.39)
Dividends in excess of net
investment income -- (.03) -- -- --
Distributions from net
realized gains (2.18) (1.06) (1.89) (.74) --
Total distributions (2.36) (1.47) (2.37) (1.21) (.39)
Net asset value, end of
period $16.23 $18.13 $18.64 $21.00 $15.42
Total return/2/ 2.73% 5.28% (.40)% 46.12% 4.55%
<CAPTION>
Six Months Year Year Year Year
Ended 4-30- Ended Ended Ended Ended
2000 10-31 10-31 10-31 10-31
Ratios/Supplemental Data (unaudited) 1999 1998 1997 1996/1/
<S> <C> <C> <C> <C> <C>
Net assets, end of period
(000) $141,347 $136,529 $142,918 $74,956 $44,509
Average net assets (000) $136,597 $144,747 $103,474 $57,369 $24,641
Ratios to average net
assets:
Expenses, including
distribution fees .89%/3/ .77% .66% .69% .73%/3/
Expenses, excluding
distribution fees .89%/3/ .77% .66% .69% .73%/3/
Net investment income 2.45%/3/ 1.97% 2.49% 2.58% 3.51%/3/
Portfolio turnover 24% 17% 22% 36% 36%
</TABLE>
--------------------------------------------------------------------------------
1 Information shown is for the period 3-1-96 (when Class Z shares were first
offered) through 10-31-96.
2 Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and sold on
the last day of each period reported. Total return for periods of less than a
full year is not annualized.
3 Annualized.
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Prudential Value Fund
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<PAGE>
--------------------------------------------------------------------------------
The Prudential Mutual Fund Family
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your
individual needs. For information about these funds, contact your financial
adviser or call us at (800) 225-1852. Read the prospectus carefully before you
invest or send money.
STOCK FUNDS
Prudential Equity Fund, Inc.
Prudential Index Series Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Equity Opportunity Fund
Prudential Jennison Growth Fund
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Prudential Small Company Fund, Inc.
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Prudential Tax-Managed Small-Cap Fund, Inc.
Prudential 20/20 Focus Fund
Prudential U.S. Emerging Growth Fund, Inc.
Prudential Value Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
Small Capitalization Growth Fund
Small Capitalization Value Fund
Asset Allocation/Balanced Funds
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
GLOBAL FUNDS
Global Stock Funds
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Global Utility Fund, Inc.
Target Funds
International Equity Fund
Global Bond Funds
Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.
--------------------------------------------------------------------------------
37
<PAGE>
--------------------------------------------------------------------------------
The Prudential Mutual Fund Family
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
BOND FUNDS
Taxable Bond Funds
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Target Funds
Total Return Bond Fund
Tax-Exempt Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
MONEY MARKET FUNDS
Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
Tax-Free Money Market Funds
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
COMMAND Funds
COMMAND Money Fund
COMMAND Government Fund
COMMAND Tax-Free Fund
Institutional Money Market Funds
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
--------------------------------------------------------------------------------
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Prudential Value Fund
38
<PAGE>
FOR MORE INFORMATION
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:
Prudential Mutual Fund Services LLC
P.O. Box 8098
Philadelphia, PA 19101
(800) 225-1852
(732) 482-7555 (Calling from outside the U.S.)
Outside Brokers should contact:
Prudential Investment Management Services LLC
P.O. Box 8310
Philadelphia, PA 19101
(800) 778-8769
Visit Prudential's Website at: http://www.prudential.com
Additional information about the Fund can be obtained without charge and can be
found in the following documents:
Statement of Additional Information (SAI)
(incorporated by reference into this prospectus)
Annual Report
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance)
Semi-Annual Report
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
BY MAIL:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
BY ELECTRONIC REQUEST:
[email protected]
(The SEC charges a fee to copy documents.)
IN PERSON:
Public Reference Room in Washington, DC
(For hours of operation, call 1-202-942-8090)
VIA THE INTERNET: on the EDGAR Database at http://www.sec.gov
CUSIP Numbers Quotron Symbols
Class A-743916207 PBEAX
Class B-743916108 PBQIX
Class C-743916306 PEICX
Class Z-743916405 PEIZX
Investment Company Act File No. 811-4864
<PAGE>
PRUDENTIAL VALUE FUND
Statement of Additional Information
dated September , 2000
Prudential Value Fund, formerly known as Prudential Equity Income Fund (the
Fund), is an open-end, diversified, management investment company. Its
investment objective is capital appreciation. It seeks to achieve these
objectives by investing primarily in common stocks and convertible securities
that provide investment income returns above those of the Standard & Poor's
500 Composite Stock Price Index or the NYSE Composite Index. In normal
circumstances, the Fund intends to invest at least 65% of its total assets in
such securities. In selecting these investments, the Fund puts emphasis on
earnings, balance sheet and cash flow analysis and the relationships that
those factors have to the price and return of a given security. The balance of
the Fund's assets may be invested in other equity-related securities, debt
securities and certain derivatives, including options on stocks and stock
indexes. Common stocks may include securities of foreign issuers. There can be
no assurance that the Fund's investment objective will be achieved. See
"Description of the Fund, Its Investments and Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated September , 2000, a copy
of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Fund History.............................................................. B-2
Description of the Fund, Its Investments and Risks........................ B-2
Investment Restrictions................................................... B-13
Management of the Fund.................................................... B-14
Control Persons and Principal Holders of Securities....................... B-17
Investment Advisory and Other Services.................................... B-18
Brokerage Allocation and Other Practices.................................. B-22
Capital Shares, Other Securities and Organization......................... B-24
Purchase, Redemption and Pricing of Fund Shares........................... B-25
Shareholder Investment Account............................................ B-35
Net Asset Value........................................................... B-39
Taxes, Dividends and Distributions........................................ B-41
Performance Information................................................... B-43
Financial Statements...................................................... B-45
Report of Independent Accountants ........................................ B-59
Financial Statements...................................................... B-60
Description of Security Ratings........................................... A-1
Appendix I--General Investment Information................................ I-1
Appendix II--Historical Performance Data.................................. II-1
</TABLE>
-------------------------------------------------------------------------------
MF131B
<PAGE>
FUND HISTORY
The Fund was organized under the laws of Massachusetts on September 18, 1986
as an unincorporated business trust, a form of organization that is commonly
known as a Massachusetts business trust. Effective September , 2000, the
Fund's name changed from Prudential Equity Income Fund to Prudential Value
Fund.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) Classification. The Fund is a diversified, open-end, management investment
company.
(b) and (c) Investment Strategies, Policies and Risks. The Fund's investment
objective is capital appreciation. While the principal investment policies and
strategies for seeking to achieve this objective are described in the Fund's
Prospectus, the Fund may from time to time also use the securities,
instruments, policies and principal and non-principal strategies described
below in seeking to achieve its objectives. The Fund may not be successful in
achieving its objective and you could lose money.
Equity and Equity-Related Securities
The Fund will invest in equity-related securities including common stocks;
non-convertible preferred stocks; securities convertible or exchangeable for
common stocks or preferred stocks; real estate investment trusts; equity
investments in partnerships; joint ventures and other forms of non-corporate
investments; American Depositary Receipts (ADRs); American Depositary Shares
(ADSs); and warrants and rights exercisable for equity securities. Common
stocks may include securities of foreign issuers.
A convertible security is typically a bond, debenture, corporate note,
preferred stock or other similar security that may be converted at a stated
price within a specified period of time into a specified number of shares of
common stock or other equity securities of the same or a different issuer. A
warrant or right entitles the holder to purchase equity securities at a
specific price for a specific period of time. Convertible securities are
generally senior to common stocks in a corporation's capital structure, but
are usually subordinated to similar non-convertible securities. While
providing a fixed income stream (generally higher in yield than the income
derivable from a common stock but lower than that afforded by a similar non-
convertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible
security's underlying common stock. Convertible securities also include
preferred stocks which technically are equity securities.
In general, the market value of a convertible security is at least the
higher of its "investment value" (that is, its value as a fixed-income
security) or its "conversion value" (that is, its value upon conversion into
its underlying common stock). As a fixed-income security, a convertible
security tends to increase in market value when interest rates decline and
tends to decrease in value when interest rates rise. However, the price of a
convertible security is also influenced by the market value of the security's
underlying common stock. The price of a convertible security tends to increase
as the market value of the underlying stock rises, whereas it tends to
decrease as the market value of the underlying stock declines. While no
securities investment is without some risk, investments in convertible
securities generally entail less risk than investments in the common stock of
the same issuer.
Fixed-Income Obligations
The Fund may invest up to 35% of its total assets in fixed-income
obligations other than money market instruments. The Fund anticipates that it
will primarily invest in fixed-income securities rated A or better by Moody's
Investors Service, Inc. (Moody's) or Standard & Poor's Ratings Group (S&P) or
BBB+ or better by Duff & Phelps Credit Rating Co. (Duff & Phelps) or
comparably rated by another nationally recognized statistical rating
organization (NRSRO). The Fund may also invest in fixed-income securities
rated Baa or lower by Moody's or BBB or lower by S&P or Duff & Phelps or
another NRSRO (although the Fund will not invest in fixed-income securities
rated lower than Ca, CC or CCC by Moody's, S&P or Duff & Phelps or another
NRSRO, respectively). After its purchase by the Fund, a fixed-income
obligation may be assigned a lower rating or cease to be rated. Such an event
would not require the elimination of the issue from the portfolio, but the
investment adviser will consider this in determining whether the Fund should
continue to hold the security in its portfolio. Securities rated Baa by
Moody's have
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speculative characteristics and changes in economic conditions or other
circumstances could lead to a weakened capacity to make principal and interest
payments than higher grade securities. Securities rated BB, Ba or BB+ or lower
by S&P, Moody's or Duff & Phelps, respectively, are generally considered to be
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. A description of corporate bond ratings is
contained in the Appendix. The Fund may also invest in unrated fixed-income
securities which, in the opinion of the investment adviser, are of a quality
comparable to rated securities in which the Fund may invest.
Risks of Investing in High Yield Securities
Fixed-income securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, the market perception of the creditworthiness of the issuer and
general market liquidity (market risk). Lower rated or unrated (that is, high
yield) securities are more likely to react to developments affecting market
and credit risk than are more highly rated securities, which react primarily
to movements in the general level of interest rates. The investment adviser
considers both credit risk and market risk in making investment decisions for
the Fund.
Under adverse economic conditions, there is a risk that highly leveraged
issuers may be unable to service their debt obligations or to repay their
obligations upon maturity. In addition, the secondary market for high yield
securities, which is concentrated in relatively few market makers, may not be
as liquid as the secondary market for more highly rated securities. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer. As a result, the investment adviser
could find it more difficult to sell these securities or may be able to sell
the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Fund's net asset value.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting
in a decline in the overall credit quality of the Fund's portfolio and
increasing the exposure of the Fund to the risks of high yield securities.
Foreign Securities
The Fund may invest up to 30% of its total assets in foreign money market
instruments and debt and equity securities. ADRs and ADSs are not considered
foreign securities within this limitation. In many instances, foreign
securities may provide higher yields but may be subject to greater
fluctuations in price than securities of domestic issuers which have similar
maturities and quality. Under certain market conditions these investments may
be less liquid than the securities of U.S. corporations and are certainly less
liquid than securities issued or guaranteed by the U.S. government, its
instrumentalities or agencies.
Foreign securities involve certain risks, which should be considered
carefully by an investor in the Fund. These risks include political or
economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of imposition of
exchange controls and the risk of currency fluctuations. Such securities may
be subject to greater fluctuations in price than securities issued by U.S.
corporations or issued or guaranteed by the U.S. government, its
instrumentalities or agencies. In addition, there may be less publicly
available information about a foreign company than about a domestic company.
Foreign companies generally are not subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to domestic
companies. There is generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States, and,
for certain foreign countries, there is a possibility of expropriation,
confiscatory taxation or diplomatic developments which could affect investment
in those countries. Finally, in the event of a default of any such foreign
debt obligations, it may be more difficult for the Fund to obtain, or to
enforce a judgment against, the issuers of such securities.
If the security is denominated in a foreign currency, it may be affected by
changes in currency rates and in exchange control regulations, and costs may
be incurred in connection with conversions between currencies. The Fund may
enter into foreign
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currency forward contracts for the purchase or sale of foreign currency for
hedging purposes. See "Risk Management and Return Enhancement Strategies--
Special Risks Related to Foreign Currency Forward Contracts" below.
Risk Factors and Special Considerations of Investing in Euro-Denominated
Securities
On January 1, 1999, 11 of the 15 member states of the European Monetary
Union introduced the "euro" as a common currency. During a three-year
transitional period, the euro will coexist with each member state's national
currency. By July 1, 2002, the euro is expected to become the sole legal
tender of the member states. During the transition period, the Fund will treat
the euro as a separate currency from the national currency of any member
state.
The adoption by the member states of the euro will eliminate the substantial
currency risk among member states and will likely affect the investment
process and considerations of the Fund's investment adviser. To the extent the
Fund holds non-U.S. dollar-denominated securities, including those denominated
in the euro, the Fund will still be subject to currency risk due to
fluctuations in those currencies as compared to the U.S. dollar.
The medium- to long-term impact of the introduction of the euro in member
states cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general long-term
ramifications can be expected, such as changes in economic environment and
changes in behavior of investors, all of which will impact the Fund's
investments.
Real Estate Investment Trusts
The Fund may invest in securities of real estate investment trusts or REITs.
Unlike corporations, REITs do not have to pay income taxes if they meet
certain requirements of the Internal Revenue Code. To qualify, a REIT must
distribute at least 95% of its taxable income to its shareholders and receive
at least 75% of that income from rents, mortgages and sales of property. REITs
offer investors greater liquidity and diversification than direct ownership of
a handful of properties, as well as greater income potential than an
investment in common stocks. Like any investment in real estate, though, a
REIT's performance depends on several factors, such as its ability to find
tenants for its properties, to renew leases and to finance property purchases
and renovations.
Risk Management and Return Enhancement Strategies
The Fund may engage in various portfolio strategies, including using
derivatives, to seek to reduce certain risks of its investments and to enhance
return. The Fund, and thus its investors, may lose money through any
unsuccessful use of these strategies. These strategies currently include the
use of options, foreign currency forward contracts and futures contracts, and
options on such contracts. The Fund's ability to use these strategies may be
limited by various factors, such as market conditions, regulatory limits and
tax considerations, and there can be no assurance that any of these strategies
will succeed. If new financial products and risk management techniques are
developed, the Fund may use them to the extent consistent with its investment
objective and policies.
Options Transactions
The Fund may purchase and write (that is, sell) put and call options on
securities that are traded on national securities exchanges or in the over-
the-counter market to seek to enhance return or to protect against adverse
price fluctuations in securities in the Fund's portfolio. These options will
be on equity securities and financial indexes (for example, S&P 500). The Fund
may write covered put and call options to generate additional income through
the receipt of premiums, purchase put options in an effort to protect the
value of a security that it owns against a decline in market value and
purchase call options in an effort to protect against an increase in the price
of securities it intends to purchase. The Fund also may purchase put and call
options to offset previously written put and call options of the same series.
A call option gives the purchaser, in exchange for a premium paid, the right
for a specified period of time to purchase the securities subject to the
option at a specified price (the exercise price or strike price). The writer
of a call option, in return for the premium, has the obligation, upon exercise
of the option, to deliver, depending upon the terms of the option contract,
the underlying securities or a specified amount of cash to the purchaser upon
receipt of the exercise price. When the Fund writes a call option, the Fund
gives up the potential for gain on the underlying securities in excess of the
exercise price of the option during the period that the option is open. There
is no limitation on the amount of call options the Fund may write.
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A put option gives the purchaser, in return for a premium, the right for a
specified period of time to sell the securities subject to the option to the
writer of the put at the specified exercise price. The writer of the put
option, in return for the premium, has the obligation, upon exercise of the
option, to acquire the securities underlying the option at the exercise price.
The Fund, as the writer of a put option, might, therefore, be obligated to
purchase the underlying securities for more than their current market price.
The Fund will write only "covered" options. An option is covered if, as long
as the Fund is obligated under the option, it (1) owns an offsetting position
in the underlying security or (2) segregates cash or other liquid assets in an
amount equal to or greater than its obligation under the option. Under the
first circumstance, the Fund's losses are limited because it owns the
underlying security; under the second circumstance, in the case of a written
call option, the Fund's losses are potentially unlimited.
Foreign Currency Forward Contracts
The Fund may enter into foreign currency forward contracts to protect the
value of its portfolio against future changes in the level of currency
exchange rates. The Fund may enter into such contracts on a spot (that is,
cash) basis at the rate then prevailing in the currency exchange market or on
a forward basis, by entering into a forward contract to purchase or sell
currency. A forward contract on foreign currency is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days agreed upon by the parties from the date of the contract at a price set
on the date of the contract.
The Fund's dealings in forward contracts will be limited to hedging
involving either specified transactions or portfolio positions. Transaction
hedging is the purchase or sale of a forward contract with respect to specific
receivables or payables of the Fund generally arising in connection with the
purchase or sale of its portfolio securities and accruals of interest or
dividends receivable and Fund expenses. Position hedging is the sale of a
foreign currency with respect to portfolio security positions denominated or
quoted in that currency or in a different foreign currency (cross hedge).
Although there are no limits on the number of forward contracts which the Fund
may enter into, the Fund may not position hedge (including cross hedges) with
respect to a particular currency for an amount greater than the aggregate
market value (determined at the time of making any sale of foreign currency)
of the securities being hedged.
Futures Contracts and Options Thereon
The Fund may purchase and sell financial futures contracts and options
thereon which are traded on a commodities exchange or board of trade to reduce
certain risks of its investments and to attempt to enhance return in
accordance with regulations of the Commodity Futures Trading Commission. These
futures contracts and options thereon will be on financial indexes. The Fund,
and thus its investors, may lose money through any unsuccessful use of these
strategies.
A stock index futures contract is an agreement to purchase or sell cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
"commodity pool operator", subject to compliance with certain conditions. The
exemption is conditioned upon the Fund's purchasing and selling futures
contracts and options thereon for bona fide hedging transactions, except that
the Fund may purchase and sell futures contracts and options thereon for any
other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the market value of the Fund's total assets.
Although there are no other limits applicable to futures contracts, the value
of all futures contracts sold will not exceed the total market value of the
Fund's portfolio.
The Fund's successful use of futures contracts and options thereon depends
upon the investment adviser's ability to predict the direction of the market
and interest rates and requires skills and techniques different from those
used in selecting portfolio securities. The correlation between movements in
the price of a futures contract and movements in the price of the securities
being hedged is imperfect and the risk from imperfect correlation increases as
the composition of the Fund's portfolio diverges from the composition of the
relevant index. There is also a risk that the value of the securities being
hedged may increase or decrease at a greater rate than the related futures
contracts, resulting in losses to the Fund. Certain futures exchanges or
boards of
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trade have established daily limits on the amount that the price of futures
contracts or options thereon may vary, either up or down, from the previous
day's settlement price. These daily limits may restrict the Fund's ability to
purchase or sell certain futures contracts or options thereon on any
particular day.
Risks of Risk Management and Return Enhancement Strategies
Participation in the options or futures markets and in currency exchange
transactions involves investment risks and transaction costs to which the Fund
would not be subject absent the use of these strategies. The Fund, and thus
its investors, may lose money through any unsuccessful use of these
strategies. If the investment adviser's predictions of movements in the
direction of the securities, foreign currency or interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
these strategies include (1) dependence on the investment adviser's ability to
predict correctly movements in the direction of interest rates, securities
prices and currency markets; (2) imperfect correlation between the price of
options and futures contracts and options thereon and movements in the prices
of the securities being hedged; (3) the fact that the skills needed to use
these strategies are different from those needed to select portfolio
securities; (4) the possible absence of a liquid secondary market for any
particular instrument at any time; (5) the risk that the counterparty may be
unable to complete the transaction; and (6) the possible inability of the Fund
to purchase or sell a portfolio security at a time that otherwise would be
favorable for it to do so, or the possible need for the Fund to sell a
portfolio security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate assets in connection with hedging
transactions.
Limitations on Purchase and Sale of Stock Options, Options on Stock
Indexes, Stock Index Futures and Options Thereon
Except as described below, the Fund will write call options on indexes only
if it holds a portfolio of stocks at least equal to the value of the index
times the multiplier times the number of contracts. When the Fund writes a
call option on a broadly-based stock market index, the Fund will segregate
with its Custodian, or pledge to a broker as collateral for the option, cash
or other liquid assets or "qualified securities" with a market value at the
time the option is written of not less than 100% of the current index value
times the multiplier times the number of contracts.
If the Fund has written an option on an industry or market segment index, it
will segregate with its Custodian, or pledge to a broker as collateral for the
option, at least ten "qualified securities," which are stocks of issuers in
such industry or market segment, with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. Such stocks will include stocks which represent
at least 50% of the weighting of the industry or market segment index and will
represent at least 50% of the Fund's holdings in that industry or market
segment. No individual security will represent more than 15% of the amount so
segregated or pledged in the case of broadly-based stock market index options
or 25% of such amount in the case of industry or market segment index options.
If at the close of business on any day the market value of such qualified
securities so segregated or pledged falls below 100% of the current index
value times the multiplier times the number of contracts, the Fund will so
segregate or pledge an amount in cash or other liquid assets, equal in value
to the difference. In addition, when the Fund writes a call on an index which
is in-the-money at the time the call is written, the Fund will segregate with
its Custodian or pledge to the broker as collateral cash or other liquid
assets, equal in value to the amount by which the call is in-the-money times
the multiplier times the number of contracts. Any amount segregated pursuant
to the foregoing sentence may be applied to the Fund's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on the National
Association of Securities Dealers Automated Quotation System against which the
Fund has not written a stock call option and which has not been hedged by the
Fund by the sale of stock index futures. However, if the Fund holds a call on
the same index as the call written where the exercise price of the call held
is equal to or less than the exercise price of the call written or greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash or other liquid assets segregated with its Custodian, it will
not be subject to the requirements described in this paragraph.
The Fund will engage only in transactions in stock index futures contracts
and options thereon as a hedge against changes, resulting from market
conditions, in the values of securities which are held in the Fund's portfolio
or which it intends to purchase
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or when they are economically appropriate for the reduction of risks inherent
in the ongoing management of the Fund or for return enhancement. The Fund may
not purchase or sell stock index futures or purchase options thereon if,
immediately thereafter, more than one-third of its net assets would be hedged
and, in addition, except as described above in the case of a call written and
held on the same index, will write call options on indexes or sell stock index
futures only if the amount resulting from the multiplication of the then
current level of the index (or indexes) upon which the option or futures
contract(s) is based, the applicable multiplier(s), and the number of futures
or options contracts which would be outstanding, would not exceed one-third of
the value of the Fund's net assets. The Fund also may not purchase or sell
stock index futures or options thereon for risk management purposes or income
enhancement if, immediately thereafter, the sum of the amount of margin
deposits on the Fund's existing futures positions and premiums paid for such
options would exceed 5% of the market value of the Fund's total assets after
taking into account unrealized profits and unrealized losses on any such
contracts, provided, however, that in the case of an option that is in-the-
money, the in-the-money amount may be excluded in computing such 5%. The above
restriction does not apply to the purchase and sale of stock index futures or
options thereon for bona fide hedging purposes. In instances involving the
purchase of stock index futures contracts by the Fund, an amount of cash and
other liquid assets, equal to the market value of the futures contracts, will
be segregated with the Fund's Custodian and/or in a margin account with a
broker to collateralize the position and thereby ensure that the use of such
futures is unleveraged.
Risks of Transactions in Stock Options
An option position may be closed out only on an exchange, board of trade or
other trading facility which provides a secondary market for an option of the
same series. Although the Fund will generally purchase or write only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option, or at any particular time, and for some options no
secondary market on an exchange or otherwise may exist. In such event it might
not be possible to effect closing transactions in particular options, with the
result that the Fund would have to exercise its options in order to realize
any profit and would incur brokerage commissions upon the exercise of call
options and upon the subsequent disposition of underlying securities acquired
through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If the Fund as a covered call
option writer is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (3) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options or underlying securities; (4) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (5) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (6) one or more exchanges could,
for economic or other reasons, decide, or be compelled at some future date, to
discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding options
on that exchange that had been issued by a clearing corporation as a result of
trades on that exchange would continue to be exercisable in accordance with
their terms. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of any of the clearing corporations inadequate, and thereby result
in the institution by an exchange of special procedures which may interfere
with the timely execution of customers' orders. The Fund intends to purchase
and sell only those options which are cleared by clearing-houses whose
facilities are considered to be adequate to handle the volume of options
transactions.
Risks of Options on Indexes
The Fund's purchase and sale of options on indexes will be subject to risks
described above under "Risks of Transactions in Stock Options." In addition,
the distinctive characteristics of options on indexes create certain risks
that are not present with stock options.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in the index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number
of stocks included in the index. If this occurred, the Fund would not be able
to close out options which it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is
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the Fund's policy to purchase or write options only on indexes which include a
number of stocks sufficient to minimize the likelihood of a trading halt in
the index.
The ability to establish and close out positions on such options will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop in all index option contracts. The
Fund will not purchase or sell any index option contract unless and until, in
the opinion of the investment adviser, the market for such options has
developed sufficiently that the risk in connection with such transactions is
no greater than the risk in connection with options on stocks.
Special Risks of Writing Calls on Indexes. Because exercises of index
options are settled in cash, a call writer such as the Fund cannot determine
the amount of its settlement obligations in advance and, unlike call writing
on specific stocks, cannot provide in advance for, or cover, its potential
settlement obligations by acquiring and holding the underlying securities.
However, the Fund will write call options on indexes only under the
circumstances described above under "Limitations on Purchase and Sale of Stock
Options, Options on Stock Indexes, Stock Index Futures and Options Thereon."
Price movements in the Fund's portfolio probably will not correlate
precisely with movements in the level of the index and, therefore, the Fund
bears the risk that the price of the securities held by the Fund may not
increase as much as the index. In such event, the Fund would bear a loss on
the call which is not completely offset by movements in the price of the
Fund's portfolio. It is also possible that the index may rise when the Fund's
portfolio of stocks does not rise. If this occurred, the Fund would experience
a loss on the call which would not be offset by an increase in the value of
its portfolio and might also experience a loss in its portfolio. However,
because the value of a diversified portfolio will, over time, tend to move in
the same direction as the market, movements in the value of the Fund's
portfolio in the opposite direction as the market would be likely to occur for
only a short period or to a small degree.
Unless the Fund has other liquid assets which are sufficient to satisfy the
exercise of a call, the Fund would be required to liquidate portfolio
securities in order to satisfy the exercise. Because an exercise must be
settled within hours after receiving the notice of exercise, if the Fund fails
to anticipate an exercise, it may have to borrow from a bank (in amounts not
exceeding 20% of the Fund's total assets) pending settlement of the sale of
securities in its portfolio and would incur interest charges thereon.
When the Fund has written a call, there is also a risk that the market may
decline between the time the Fund has a call exercised against it, at a price
which is fixed as of the closing level of the index on the date of exercise,
and the time the Fund is able to sell stocks in its portfolio. As with stock
options, the Fund will not learn that an index option has been exercised until
the day following the exercise date but, unlike a call on stock where the Fund
would be able to deliver the underlying securities in settlement, the Fund may
have to sell part of its investment portfolio in order to make settlement in
cash, and the price of such securities might decline before they can be sold.
This timing risk makes certain strategies involving more than one option
substantially more risky with index options than with stock options. For
example, even if an index call which the Fund has written is "covered" by an
index call held by the Fund with the same strike price, the Fund will bear the
risk that the level of the index may decline between the close of trading on
the date the exercise notice is filed with the clearing corporation and the
close of trading on the date the Fund exercises the call it holds or the time
the Fund sells the call which in either case would occur no earlier than the
day following the day the exercise notice was filed.
Special Risks of Purchasing Puts and Calls on Indexes. If the Fund holds an
index option and exercises it before final determination of the closing index
value for that day, it runs the risk that the level of the underlying index
may change before closing. If such a change causes the exercised option to
fall out-of-the-money, the Fund will be required to pay the difference between
the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer. Although the Fund may be able
to minimize this risk by withholding exercise instructions until just before
the daily cutoff time or by selling rather than exercising an option when the
index level is close to the exercise price, it may not be possible to
eliminate this risk entirely because the cutoff times for index options may be
earlier than those fixed for other types of options and may occur before
definitive closing index values are announced.
Special Risks Related to Foreign Currency Forward Contracts
The Fund may enter into foreign currency forward contracts in several
circumstances. When the Fund enters into a contract for the purchase or sale
of a security denominated in a foreign currency, or when the Fund anticipates
the receipt in a foreign
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currency of dividends or interest payments on a security which it holds, the
Fund may desire to "lock-in" the U.S. dollar price of the security or the U.S.
dollar equivalent of such dividend or interest payment, as the case may be. By
entering into a forward contract for a fixed amount of dollars, for the
purchase or sale of the amount of foreign currency involved in the underlying
transactions, the Fund may be able to protect itself against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar
and the subject foreign currency during the period between the date on which
the security is purchased or sold, or on which the dividend or interest
payment is declared, and the date on which such payment is made or received.
Additionally, when the investment adviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, the Fund may enter into a forward contract for a fixed amount of
dollars to sell the amount of foreign currency approximating the value of some
or all of the Fund's portfolio securities denominated in such foreign
currency. The precise matching of the forward contract amounts and the value
of the securities involved will not generally be possible since the future
value of securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the date on which
the forward contract is entered into and the date it matures. The projection
of short-term currency market movement is extremely difficult, and the
successful execution of a short-term hedging strategy is highly uncertain. The
Fund does not intend to enter into such forward contracts to protect the value
of its portfolio securities on a regular or continuous basis. The Fund will
also not enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the Fund to
deliver an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency. Under
normal circumstances, consideration of the prospect for currency parities will
be incorporated into the long-term investment decisions made with regard to
overall diversification strategies. However, the Fund believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interest of the Fund will thereby be served. If the
Fund enters into a position hedging transaction, the transaction will be
"covered" by the position being hedged or the Fund's Custodian will segregate
cash or other liquid assets of the Fund (less the value of the "covering"
positions, if any) in an amount equal to the value of the Fund's total assets
committed to the consummation of the given forward contract.
The Fund generally will not enter into a forward contract with a term of
greater than one year. At the maturity of a forward contract, the Fund may
either sell the portfolio security and make delivery of the foreign currency,
or it may retain the security and terminate its contractual obligation to
deliver the foreign currency by purchasing an "offsetting" contract with the
same currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly,
it may be necessary for the Fund to purchase additional foreign currency on
the spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. Should forward
prices decline during the period between the Fund's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent that the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The Fund's dealings in foreign currency forward contracts will be limited to
the transactions described above. Of course, the Fund is not required to enter
into such transactions with regard to its foreign currency-denominated
securities. Also this method of protecting the value of the Fund's portfolio
securities against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities which are unrelated to
exchange rates. Additionally, although such contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, they also
tend to limit any potential gain which might result should the value of such
currency increase. The Fund's ability to enter into foreign currency forward
contracts may be limited by certain requirements for qualification as a
regulated investment company under the Internal Revenue Code. See "Taxes,
Dividends and Distributions."
Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend physically to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of
B-9
<PAGE>
currency conversion. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the spread)
between the prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to resell that
currency to the dealer.
When-Issued and Delayed Delivery Securities
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the Fund with payment and delivery taking
place in the future in order to secure what is considered to be an
advantageous price and yield to the Fund at the time of entering into the
transaction. The Fund's Custodian will segregate cash or other liquid assets
having a value equal to or greater than the Fund's purchase commitments. The
securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during the period between purchase and settlement. At
the time of delivery of the securities the value may be more or less than the
purchase price and an increase in the percentage of the Fund's assets
committed to the purchase of securities on a when-issued or delayed delivery
basis may increase the volatility of the Fund's net asset value.
Short Sales Against-the-Box
The Fund may make short sales of securities or maintain a short position,
provided that at all times when a short position is open, the Fund owns an
equal amount of such securities or securities convertible into or exchangeable
for, without payment of any further consideration, such securities; provided
that if further consideration is required in connection with the conversion or
exchange, cash or other liquid assets in an amount equal to such consideration
must be segregated for an equal amount of the securities of the same issuer as
the securities sold short (a short sale against-the-box). Not more than 25% of
the Fund's net assets (determined at the time of the short sale) may be
subject to such sales.
Repurchase Agreements
The Fund may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money
is invested in the repurchase agreement. The Fund's repurchase agreements will
at all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily, and if the value
of the instruments declines, the Fund will require additional collateral. If
the seller defaults and the value of the collateral securing the repurchase
agreement declines, the Fund may incur a loss.
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the investment adviser. In the event of
a default or bankruptcy by a seller, the Fund will promptly seek to liquidate
the collateral.
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM)
pursuant to an order of the Securities and Exchange Commission (Commission).
On a daily basis, any uninvested cash balances of the Fund may be aggregated
with those of such investment companies and invested in one or more repurchase
agreements. Each fund participates in the income earned or accrued in the
joint account based on the percentage of its investment.
Borrowing
The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes, or
for the clearance of transactions and to take advantage of investment
opportunities. The Fund may pledge up to 20% of its total assets to secure
these borrowings. If the Fund borrows to invest in securities, any investment
gains made on the securities in excess of interest paid on the borrowing will
cause the net asset value of the shares to rise faster than would otherwise be
the case. On the other hand, if the investment performance of the additional
securities purchased fails to cover their cost (including any interest paid on
the money borrowed) to the Fund, the net asset value of the Fund's shares will
decrease faster than would otherwise be the case. This is the speculative
factor known as "leverage." If the Fund's asset coverage for borrowings falls
below 300%, the Fund will take prompt action (within 3 days) to reduce its
borrowings.
B-10
<PAGE>
If the 300% asset coverage should decline as a result of market fluctuations
or other reasons, the Fund may be required to sell portfolio securities to
reduce the debt and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell securities at that time.
Lending of Securities
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and financial institutions, provided
that outstanding loans do not exceed in the aggregate 33% of the value of the
Fund's total assets and that the loans are callable at any time by the Fund.
As a matter of fundamental policy, the Fund will not lend more than 33% of the
value of its total assets. The loans must at all times be secured by cash or
other liquid assets or secured by an irrevocable letter of credit in favor of
the Fund in an amount equal to at least 100%, determined daily, of the market
value of the loaned securities. The collateral is segregated pursuant to
applicable regulations. During the time portfolio securities are on loan, the
borrower will pay the Fund an amount equivalent to any dividend or interest
paid on such securities and the Fund may invest the cash collateral and earn
additional income, or it may receive an agreed-upon amount of interest income
from the borrower. The advantage of such loans is that the Fund continues to
receive payments in lieu of the interest and dividends on the loaned
securities, while at the same time earning interest either directly from the
borrower or on the collateral, which will be invested in short-term
obligations.
A loan may be terminated by the borrower or by the Fund at any time. If the
borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates and the Fund can use the collateral to replace the
securities while holding the borrower liable for any excess of replacement
cost over collateral. As with any extensions of credit, there are risks of
delay in recovery and in some cases loss of rights in the collateral should
the borrower of the securities fail financially. However, these loans of
portfolio securities will only be made to firms determined to be creditworthy
pursuant to procedures approved by the Trustees of the Fund. On termination of
the loan, the borrower is required to return the securities to the Fund, and
any gain or loss in the market price during the loan would inure to the Fund.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the
matters involved would have a material effect on the Fund's investment in the
securities which are the subject of the loan. The Fund will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
Segregated Assets
The Fund will segregate with its Custodian, State Street Bank and Trust
Company (State Street), cash, U.S. Government securities, equity securities
(including foreign securities), debt securities or other liquid, unencumbered
assets equal in value to its obligations in respect of potentially leveraged
transactions. These include forward contracts, when-issued and delayed
delivery securities, futures contracts, written options and options on futures
contracts (unless otherwise covered). If collateralized or otherwise covered,
in accordance with Commission guidelines, these will not be deemed to be
senior securities. The assets segregated will be marked-to-market daily.
Illiquid Securities
The Fund may hold up to 15% of its net assets in illiquid securities. If the
Fund were to exceed this limit, the investment adviser would take prompt
action to reduce the Fund's holdings in illiquid securities to no more than
15% of its net assets, as required by applicable law. Illiquid securities
include repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable in securities
markets either within or outside of the United States. Repurchase agreements
subject to demand are deemed to have a maturity equal to the applicable notice
period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the Securities Act),
securities which are otherwise not readily marketable and repurchase
agreements having a maturity of longer than seven days. Securities which have
not been
B-11
<PAGE>
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have
an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven days. A mutual fund might also have to
register such restricted securities in order to dispose of them resulting in
additional expense and delay. Adverse market conditions could impede such a
public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes.
Institutional investors depend on an efficient institutional market in which
the unregistered security can be readily resold or on an issuer's ability to
honor a demand for repayment. The fact that there are contractual or legal
restrictions on resale to the general public or to certain institutions may
not be indicative of the liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to
the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. The investment adviser
anticipates that the market for certain restricted securities such as
institutional commercial paper and foreign securities will expand further as a
result of this regulation and the development of automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
Restricted securities eligible for resale pursuant to Rule 144A under the
Securities Act and privately placed commercial paper for which there is a
readily available market are treated as liquid only when deemed liquid under
procedures established by the Trustees. The Fund's investment in Rule 144A
securities could have the effect of increasing illiquidity to the extent that
qualified institutional buyers become, for a limited time, uninterested in
purchasing Rule 144A securities. The investment adviser will monitor the
liquidity of such restricted securities subject to the supervision of the
Trustees. In reaching liquidity decisions, the investment adviser will
consider, among others, the following factors: (1) the frequency of trades and
quotes for the security; (2) the number of dealers wishing to purchase or sell
the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). In addition, in order for commercial paper that is
issued in reliance on Section 4(2) of the Securities Act to be considered
liquid, (a) it must be rated in one of the two highest rating categories by at
least two nationally recognized statistical rating organizations (NRSRO), or
if only one NRSRO rates the securities, by that NRSRO, or, if unrated, be of
comparable quality in the view of the investment adviser, and (b) it must not
be "traded flat" (that is, without accrued interest) or in default as to
principal or interest.
The staff of the Commission has taken the position that purchased over-the-
counter options and the assets used as "cover" for written over-the-counter
options are illiquid securities unless the Fund and the counterparty have
provided for the Fund, at the Fund's election, to unwind the over-the-counter
option. The exercise of such an option ordinarily would involve the payment by
the Fund of an amount designed to reflect the counterparty's economic loss
from an early termination, but does allow the Fund to treat the assets used as
"cover" as "liquid."
(d) Defensive Strategy and Short-term Investments
When conditions dictate a temporary defensive strategy or pending investment
of proceeds from sales of the Fund's shares, the Fund may invest without limit
in money market instruments, including commercial paper of domestic
corporations, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks, and obligations issued or
guaranteed by the U.S. Government, its instrumentalities or its agencies. Such
obligations (other than U.S. Government securities) will be rated, at the time
of purchase, within the two highest quality grades as determined by an NRSRO
such as Moody's, S&P or Duff & Phelps or, if unrated, will be of equivalent
quality in the judgment of the Fund's investment adviser.
(e) Portfolio Turnover
As a result of the investment policies described above, the Fund may engage
in a substantial number of portfolio transactions, and the Fund's portfolio
turnover rate may exceed 100%, but is not expected to exceed 200%. The
portfolio turnover
B-12
<PAGE>
rates for the Fund for the fiscal years ended October 31, 1999 and 1998 were
17% and 22%, respectively. The portfolio turnover rate is generally the
percentage computed by dividing the lesser of portfolio purchases or sales
(excluding all securities, including options, whose maturities or expiration
date at acquisition were one year or less) by the monthly average value of the
long-term portfolio. High portfolio turnover (100% or more) involves
correspondingly greater brokerage commissions and other transaction costs,
which are borne directly by the Fund. In addition, high portfolio turnover may
also mean that a proportionately greater amount of distributions to
shareholders will be taxed as ordinary income rather than long-term capital
gains compared to investment companies with lower portfolio turnover. See
"Brokerage Allocation and Other Practices" and "Taxes, Dividends and
Distributions."
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the
Fund's outstanding voting securities," when used in this Statement of
Additional Information, means the lesser of (1) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting
shares are present in person or represented by proxy or (2) more than 50% of
the outstanding voting shares.
The Fund may not:
(1) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or maintenance margin in
connection with stock index futures or options thereon is not considered the
purchase of a security on margin.
(2) Make short sales of securities or maintain a short position, except
short sales against-the-box.
(3) Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or
for the clearance of transactions and to take advantage of investment
opportunities. The Fund may pledge up to 20% of the value of its total assets
to secure such borrowings. For purposes of this restriction, the purchase or
sale of securities on a when-issued or delayed delivery basis, forward foreign
currency exchange contracts and collateral and collateral arrangements
relating thereto, collateral arrangements with respect to stock index futures
and options thereon and with respect to the writing of options on securities
or on stock indices and obligations of the Fund to Trustees pursuant to
deferred compensation arrangements are not deemed to be a pledge of assets or
the issuance of a senior security.
(4) Purchase any security (other than obligations of the U.S. Government,
its agencies or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined
at the time of investment) would then be invested in securities of a single
issuer, or (ii) more than 25% of the Fund's total assets (determined at the
time of investment) would be invested in a single industry. As to utility
companies, gas, electric and telephone companies will be considered as
separate industries.
(5) Purchase any security if as a result the Fund would then hold more than
10% of the outstanding voting securities of an issuer.
(6) Buy or sell real estate or interests in real estate, except that the
Fund may purchase and sell securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly
traded securities of real estate investment trusts. The Fund may not purchase
interests in real estate limited partnerships which are not readily
marketable.
(7) Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell stock index futures contracts and options thereon. (For
purposes of this restriction, foreign currency forward contracts are not
deemed to be a commodity or commodity contract.)
(8) Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
B-13
<PAGE>
(9) Make investments for the purpose of exercising control or management.
(10) Invest in securities of other registered investment companies, except
as permitted under the Investment Company Act of 1940 and the rules
thereunder, as amended from time to time, or by any exemptive relief granted
by the Securities and Exchange Commission. (Currently, under the Investment
Company Act of 1940, the Fund may invest in securities of other investment
companies subject to the following limitations: the Fund may hold not more
than 3% of the outstanding voting securities of any one investment company,
may not have invested more than 5% of its total assets in any one investment
company and may not have invested more than 10% of its total assets in
securities of one or more investment companies.)
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
(12) Make loans, except through repurchase agreements and loans of portfolio
securities (limited to 33% of the Fund's total assets) and as otherwise
permitted by exemptive order of the Securities and Exchange Commission.
(13) Purchase warrants if as a result the Fund would then have more than 5%
of its total assets (taken at current value) invested in warrants or more than
2% of its total assets (taken at current value) invested in warrants not
listed on the New York or American Stock Exchanges.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the
percentage limitation is met at the time the investment is made, a later
change in percentage resulting from changing total or net asset values will
not be considered a violation of such policy. However, in the event that the
Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings, as required by applicable law.
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
Principal Occupations
Name and Address** (Age) Position with Fund During Past Five Years
------------------------ ------------------ ----------------------
<C> <C> <S>
Delayne Dedrick Gold Trustee Marketing and Management
(61) Consultant.
*Robert F. Gunia (53) Vice President and Executive Vice President and
Trustee Chief Administrative Officer
(since June 1999) of
Prudential Investments;
Executive Vice President and
Treasurer (since December
1996) of Prudential
Investments Fund Management
LLC (PIFM); President (since
April 1999) of Prudential
Investment Management Services
LLC (PIMS); formerly Corporate
Vice President (September
1997-March 1999) of The
Prudential Insurance Company
of America (Prudential);
Senior Vice President (March
1987-May 1999) of Prudential
Securities Incorporated
(Prudential Securities); and
Chief Administrative Officer
(July 1990-September 1996),
Director (January 1989-
September 1996), and Executive
Vice President, Treasurer and
Chief Financial Officer (June
1987-September 1996) of
Prudential Mutual Fund
Management, Inc.
Douglas H. McCorkindale Trustee Chairman (since June 2000) and
(60) President (since September
1997) of Gannett Co. Inc.
(publishing and media),
formerly Vice Chairman (March
1984-May 2000) of Gannett Co.
Inc.; Director of Continental
Airlines, Inc., Gannett Co.
Inc. and Global Crossing Ltd.
Corporation.
</TABLE>
B-14
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name and Address** (Age) Position with Fund During Past Five Years
------------------------ ------------------ ----------------------
<C> <C> <S>
Thomas T. Mooney (58) Trustee President of the Greater
Rochester Metro Chamber of
Commerce; former Rochester
City Manager; former Deputy
Monroe County Executive;
Trustee of Center for
Governmental Research, Inc.;
Director of Blue Cross of
Rochester, Monroe County Water
Authority and Executive
Service Corps of Rochester.
Stephen P. Munn (57) Trustee Chairman (since January 1994),
Director and President (since
1988) and Chief Executive
Officer (1988-December 1993)
of Carlisle Companies
Incorporated (manufacturer of
industrial products).
*David R. Odenath, Jr. Trustee Officer in Charge, President,
(42) Chief Executive Officer and
Chief Operating Officer (since
June 1999), PIFM; Senior Vice
President (since June 1999),
Prudential; formerly Senior
Vice President (August 1993-
May 1999), PaineWebber Group,
Inc.
Richard A. Redeker (56) Trustee Formerly President, Chief
Executive Officer and Director
(October 1993-September 1996),
Prudential Mutual Fund
Management, Inc., Executive
Vice President, Director and
Member of Operating Committee
(October 1993-September 1996),
Prudential Securities,
Director (October 1993-
September 1996) of Prudential
Securities Group, Inc.,
Executive Vice President, The
Prudential Investment
Corporation (January 1994-
September 1996), Director
(January 1994-September 1996),
Prudential Mutual Fund
Distributors, Inc. and
Prudential Mutual Fund
Services, Inc., and Senior
Executive Vice President and
Director of Kemper Financial
Services, Inc. (September
1978-September 1993).
Robin B. Smith (60) Trustee Chairman and Chief Executive
Officer (since August 1996),
formerly President and Chief
Executive Officer (January
1988-August 1996) and
President and Chief Operating
Officer (September 1981-
December 1988) of Publishers
Clearing House; Director of
BellSouth Corporation, Texaco
Inc., Spring Industries Inc.
and Kmart Corporation.
*John R. Strangfeld (46) President and Chief Executive Officer,
Trustee Chairman, President and
Director (since January 1990)
of The Prudential Investment
Corporation, Executive Vice
President (since February
1998), Prudential Global Asset
Management Group of
Prudential, and Chairman
(since August 1989), Pricoa
Capital Group; formerly
various positions to Chief
Executive Officer (November
1994-December 1998), Private
Asset Management Group of
Prudential and Senior Vice
President (January 1986-August
1989), Prudential Capital
Group, a unit of Prudential.
Louis A. Weil, III (58) Trustee Chairman (since January 1999),
President and Chief Executive
Officer (since January 1996)
and Director (since September
1991) of Central Newspapers,
Inc.; Chairman of the Board
(since January 1996),
Publisher and Chief Executive
Officer (August 1991-December
1995) of Phoenix Newspapers,
Inc.; formerly, Publisher (May
1989-March 1991) of Time
Magazine, President, Publisher
and Chief Executive Officer
(February 1986-August 1989) of
The Detroit News and member of
the Advisory Board, Chase
Manhattan Bank-Westchester.
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name and Address** (Age) Position with Fund During Past Five Years
------------------------ ------------------ ----------------------
<C> <C> <S>
Clay T. Whitehead (61) Trustee President, National Exchange
Inc. (new business development
firm) (since May 1983).
Grace C. Torres (40) Treasurer and First Vice President (since
Principal Financial December 1996) of PIFM; First
and Accounting Vice President (since March
Officer 1993) of Prudential Securities;
formerly First Vice President
(March 1994-September 1996) of
Prudential Mutual Fund
Management, Inc.
Stephen M. Ungerman (46) Assistant Treasurer Tax Director (since March 1996)
of Prudential Investments;
formerly First Vice President
(February 1993-September 1996)
of Prudential Mutual Fund
Management, Inc.
Marguerite E. H. Morri- Secretary Vice President and Associate
son (43) General Counsel (since December
1996) of PIFM; Vice President
and Associate General Counsel
of Prudential Securities;
formerly Vice President and
Associate General Counsel (June
1991-September 1996) of
Prudential Mutual Fund
Management, Inc.
William V. Healey (46) Assistant Secretary Vice President and Associate
General Counsel of Prudential
and Chief Legal Officer of The
Prudential Investment
Corporation (since August
1998); Director, ICI Mutual
Insurance Company (since June
1999); formerly Associate
General Counsel of The Dreyfus
Corporation (Dreyfus), a
subsidiary of Mellon Bank, N.A.
(Mellon Bank), and an officer
and/or director of various
affiliates of Mellon Bank and
Dreyfus.
</TABLE>
----------
* "Interested" Trustee, as defined in the Investment Company Act, by reason
of affiliation with Prudential Securities, Prudential or PIFM.
** The address of the Trustees and officers is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
The Fund has Trustees who, in addition to overseeing the actions of the
Fund's Manager, Subadviser and Distributor, decide upon matters of general
policy. The Trustees also review the actions of the Fund's officers, who
conduct and supervise the daily business operations of the Fund.
The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 75.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Trustees of the Fund who are affiliated persons of the
Manager. The Fund pays each of its Trustees who is not an affiliated person of
the Manager or the investment adviser annual compensation of $4,000 in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Trustee may change as a result of the introduction of additional
funds on the boards of which the Trustee will be asked to serve.
Trustees may receive their Trustee's fee pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Trustee's fees which accrue interest at a rate equivalent
to the prevailing rate applicable to 90-day U.S. Treasury bills at the
beginning of each calendar quarter or, pursuant to a Commission exemptive
order, at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Trustee. The Fund's obligation to make payments of deferred Trustees' fees,
together with interest thereon, is a general obligation of the Fund.
B-16
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
to the Trustees who are not affiliated with the Manager for the fiscal year
ended October 31, 1999 and the aggregate compensation paid to such Trustees
for service on the Fund's Board and the boards of all other investment
companies managed by PIFM (Fund Complex) for the calendar year ended December
31, 1999.
Compensation Table
<TABLE>
<CAPTION>
Total 1999
Compensation
From Fund
Aggregate and Fund
Compensation Complex Paid
Name and Position From Fund to Trustees
----------------- ------------ ----------------
<S> <C> <C>
Edward D. Beach--Former Trustee++ $4,000 $142,500(43/70)*
Delayne D. Gold--Trustee $4,000 $144,500(43/70)*
Robert F. Gunia--Trustee+ -- None
Douglas H. McCorkindale--Trustee** $4,000 $ 80,000(24/49)*
Thomas T. Mooney--Trustee** $4,000 $129,500(35/75)*
Stephen P. Munn--Trustee $4,000 $ 62,250(29/53)*
David R. Odenath, Jr.--Trustee+ -- None
Richard A. Redeker--Trustee $3,000 $ 95,000(29/53)*
Robin B. Smith--Trustee** $4,000 $ 96,000(32/44)*
John R. Strangfeld--President and Trustee+ -- None
Louis A. Weil, III--Trustee $4,000 $ 96,000(29/53)*
Clay T. Whitehead--Trustee $4,000 $ 77,000(38/66)*
</TABLE>
----------
* Indicates number of Funds/portfolios in Fund Complex to which aggregate
compensation relates.
** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1999, includes amounts deferred at the
election of Trustees under the funds' deferred compensation plans.
Including accrued interest, total compensation amounted to $97,916,
$135,102 and $156,478 for Messrs. McCorkindale and Mooney and Ms. Smith,
respectively.
+ Interested Trustees do not receive compensation from the Fund or any fund in
the Fund Complex.
++ Mr. Beach retired on December 31, 1999.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Trustees of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or contingent deferred
sales charge to a limited group of investors. As of June 23, 2000, the
Trustees and officers of the Fund, as a group, owned beneficially less than 1%
of the outstanding shares of beneficial interest of the Fund.
As of June 23, 2000, beneficial owners, directly or indirectly, of more than
5% of any class of shares of the Fund were:
<TABLE>
<CAPTION>
Number of Shares/
Name Address Class % of Class
---- ----------------------- ----- -----------------
<S> <C> <C> <C>
Prudential Trust Company 34 West Sixth Street C 119,516(7.8%)
FBO Mash, Inc. Suite 1100
Cincinnati, OH 45202
Boston Safe Deposit & Trust 1 Cabot Rd. Z 4,772,459(56%)
as trustee for K-Mart 401(k) AIM # 028-0035
Medford, MA 02157
Prudential Trust Company 30 Scranton Office Park Z 1,853,826(21.8%)
FBO Pru DC Trust Accts Moosic, PA 18507
Attn John Surdy
</TABLE>
B-17
<PAGE>
As of June 23, 2000, Prudential Securities was record holder of 16,026,081
Class A shares (or 48% of the outstanding Class A shares), 21,057,979 Class B
shares (or 50% of the outstanding Class B shares), 783,846 Class C shares (or
51% of the outstanding Class C shares) and 345,138 Class Z shares (or 4% of
the outstanding Class Z shares) of the Fund. In the event of any meetings of
shareholders, Prudential Securities will forward, or cause the forwarding of,
proxy material to the beneficial owners for which it is the record holder.
INVESTMENT ADVISORY AND OTHER SERVICES
(a) Manager and Investment Adviser
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other investment companies
that, together with the Fund, comprise the Prudential mutual funds. See "How
the Fund is Managed--Manager" in the Prospectus. As of August 31, 2000, PIFM
managed and/or administered open-end and closed-end management investment
companies with assets of approximately $ billion. According to the
Investment Company Institute, as of September 30, 1999, the Prudential Mutual
Funds were the 20th largest family of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent and dividend distribution agent for the Prudential mutual funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PIFM is obligated to keep certain books and records of the Fund.
PIFM has hired The Prudential Investment Corporation, doing business as
Prudential Investments (PI, the investment adviser or the Subadviser), to
provide subadvisory services to the Fund. PIFM also administers the Fund's
business affairs and, in connection therewith, furnishes the Fund with office
facilities, together with those ordinary clerical and bookkeeping services
which are not being furnished by State Street Bank and Trust Company (the
Custodian), the Fund's custodian, and PMFS, the Fund's transfer and dividend
disbursing agent. The management services of PIFM for the Fund are not
exclusive under the terms of the Management Agreement and PIFM is free to, and
does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .60 of 1% of the Fund's average daily net assets up to
$500 million, .50 of 1% of average daily net assets between $500 million and
$1 billion, .475 of 1% of average daily net assets between $1 billion and $1.5
billion and .45 of 1% of average daily net assets in excess of $1.5 billion.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of
PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses
not incurred in the ordinary course of the Fund's business) for any fiscal
year exceed the lowest applicable annual expense limitation established and
enforced pursuant to the statutes or regulations of any jurisdiction in which
the Fund's shares are qualified for offer and sale, the compensation due PIFM
will be reduced by the amount of such excess. No jurisdiction currently limits
the Fund's expenses.
In connection with its management of the business affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of PIFM or
the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the
Fund as described below; and
(c) the costs and expenses payable to the investment adviser pursuant to the
subadvisory agreement between PIFM and PI (the Subadvisory Agreement).
B-18
<PAGE>
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Trustees who are not affiliated persons of the
Manager or the Fund's investment adviser, (c) the fees and certain expenses of
the Custodian and Transfer Agent, including the cost of providing records to
the Manager in connection with its obligation of maintaining required records
of the Fund and of pricing the Fund's shares, (d) the charges and expenses of
legal counsel and independent accountants for the Fund, (e) brokerage
commissions and any issue or transfer taxes chargeable to the Fund in
connection with its securities transactions, (f) all taxes and corporate fees
payable by the Fund to governmental agencies, (g) the fees of any trade
associations of which the Fund may be a member, (h) the cost of share
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the
fees and expenses involved in registering and maintaining registration of the
Fund and of its shares with the Commission, including the preparation and
printing of the Fund's registration statements and prospectuses for such
purposes, and paying the fees and expenses of notice filings made in
accordance with state securities laws, (k) allocable communications expenses
with respect to investor services and all expenses of shareholders' and
Trustees' meetings and of preparing, printing and mailing reports, proxy
statements and prospectuses to shareholders in the amount necessary for
distribution to the shareholders, (l) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Fund's business and (m) distribution fees.
The Management Agreement provides that PIFM will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically
if assigned, and that it may be terminated without penalty by either party
upon not more than 60 days' nor less than 30 days' written notice. The
Management Agreement will continue in effect for a period of more than two
years from the date of execution only so long as such continuance is
specifically approved at least annually in conformity with the Investment
Company Act.
For the fiscal years ended October 31, 1999, 1998 and 1997, PIFM received
management fees of $10,287,851, $10,945,895 and $8,306,148, respectively.
PIFM has entered into the Subadvisory Agreement with PI (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PI will furnish investment advisory services in connection with the management
of the Fund. In connection therewith, PI is obligated to keep certain books
and records of the Fund. PIFM continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and
supervises PI's performance of such services. PI was reimbursed by PIFM for
the reasonable costs and expenses incurred by PI in furnishing those services.
Effective January 1, 2000, PI is paid by PIFM at an annual rate of .30 of 1%
of the Fund's average daily net assets up to $500 million, .238 of 1% of
average daily net assets between $500 million and $1 billion, .214 of 1% of
average daily net assets between $1 billion and $1.5 billion and .191 of 1% of
average daily net assets in excess of $1.5 billion (representing approximately
half of the compensation received from the Fund by PIFM).
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM or PI upon not more than 60 days', nor less than
30 days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
(b) Principal Underwriter, Distributor and Rule 12b-1 Plans
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. The Distributor is a subsidiary
of Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the
Fund under Rule 12b-1 under the Investment Company Act and a distribution
agreement (the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
also incurs the expenses of distributing the Fund's Class Z shares under the
Distribution Agreement, none of which are reimbursed by or paid for by the
Fund.
B-19
<PAGE>
The expenses incurred under the Plans include commissions and account
servicing fees paid to, or on account of, brokers or financial institutions
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of the Distributor associated with the sale of
Fund shares, including lease, utility, communications and sales promotion
expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the
distribution, marketing, administrative and other services and activities
provided by brokers with respect to the promotion of the sale of the Fund's
shares and the maintenance of related shareholder accounts.
Class A Plan. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an
annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares. The Class A Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (2) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30
of 1%. The Distributor has contractually agreed to limit its distribution-
related fees payable under the Class A Plan to .25 of 1% of the average daily
net assets of the Class A shares for the fiscal year ending October 31, 2000
and voluntarily limited its distribution-related fees for the fiscal year
ended October 31, 1999 to .25 of 1% of the average daily net assets of the
Class A shares.
For the fiscal year ended October 31, 1999, the Distributor received
payments of $1,634,495 under the Class A Plan and spent approximately
$1,584,339 in distributing the Class A shares. This amount was primarily
expended for payments of account servicing fees to financial advisers and
other persons who sell Class A shares. For the fiscal year ended October 31,
1999, the Distributor also received approximately $376,500 in initial sales
charges.
Class B and Class C Plans. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan
provides that (1) up to .25 of 1% of the average daily net assets of the Class
B shares may be paid as a service fee and (2) up to .75 of 1% (not including
the service fee) of the average daily net assets of the Class B shares (asset-
based sales charge) may be paid for distribution-related expenses with respect
to the Class B shares. The Class C Plan provides that (1) up to .25 of 1% of
the average daily net assets of the Class C shares may be paid as a service
fee and (2) up to .75 of 1% of the average daily net assets of the Class C
shares may be paid for distribution-related expenses with respect to Class C
shares. The service fee (.25 of 1% of average daily net assets) is used to pay
for personal service and/or the maintenance of shareholder accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders and, with respect to Class C shares, initial sales
charges.
Class B Plan. For the fiscal year ended October 31, 1999, the Distributor
received $12,006,633 from the Fund under the Class B Plan and spent
approximately $5,443,700 in distributing the Fund's Class B shares. It is
estimated that of the latter amount, approximately 0.1% ($7,400) was spent on
printing and mailing of prospectuses to other than current shareholders; 24.6%
($1,334,000) on compensation to broker-dealers for commissions to
representatives and other expenses, including an allocation of overhead and
other branch office distribution-related expenses, incurred by it for
distribution of Fund shares; and 75.3% ($4,102,300) on the aggregate of (1)
payments of commissions and account servicing fees to financial advisers
(57.5% or $3,129,800) and (2) an allocation of overhead and other branch
office distribution-related expenses for payments of related expenses (17.8%
or $972,500). The term "overhead and other branch office distribution-related
expenses" represents (a) the expenses of operating Prudential Securities' and
Pruco Securities Corporation's (Prusec's) branch offices in connection with
the sale of Fund shares, including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs
of client sales seminars, (c) expenses of mutual fund sales coordinators to
promote the sale of Fund shares and (d) other incidental expenses relating to
branch promotion of Fund sales.
B-20
<PAGE>
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. For the
fiscal year ended October 31, 1999, the Distributor received approximately
$2,448,000 in contingent deferred sales charges attributable to Class B
shares.
Class C Plan. For the fiscal year ended October 31, 1999, the Distributor
received $369,808 under the Class C Plan and spent approximately $314,300 in
distributing Class C shares. It is estimated that of the latter amount,
approximately 4.4% ($13,700) was spent on compensation to broker-dealers for
commissions to representatives and other expenses, including an allocation of
overhead and other branch office distribution-related expenses, incurred for
distribution of Fund shares; and 95.6% ($300,600) on the aggregate of (1)
payments of commissions and account servicing fees to financial advisers
(85.0% or $267,200) and (2) an allocation of overhead and other branch office
distribution-related expenses for payments of related expenses (10.6% or
$33,400).
The Distributor also receives initial sales charges and the proceeds of
contingent deferred sales charges paid by investors upon certain redemptions
of Class C shares. For the fiscal year ended October 31, 1999, the Distributor
received approximately $30,100 in contingent deferred sales charges
attributable to Class C shares. For the fiscal year ended October 31, 1999,
the Distributor also received approximately $54,600 in initial sales charges
attributable to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of the Fund are allocated to each such class based upon the ratio of
sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in
the Class A, Class B or Class C Plan or in any agreement related to the Plans
(Rule 12b-1 Trustees), cast in person at a meeting called for the purpose of
voting on such continuance. A Plan may be terminated at any time, without
penalty, by the vote of a majority of the Rule 12b-1 Trustees or by the vote
of the holders of a majority of the outstanding shares of the applicable class
of the Fund on not more than 30 days' written notice to any other party to the
Plan. The Plans may not be amended to increase materially the amounts to be
spent for the services described therein without approval by the shareholders
of the applicable class (by both Class A and Class B shareholders, voting
separately, in the case of material amendments to the Class A Plan), and all
material amendments are required to be approved by the Trustees in the manner
described above. Each Plan will automatically terminate in the event of its
assignment. The Fund will not be contractually obligated to pay expenses
incurred under any Plan if it is terminated or not continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the
Rule 12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers (including Prudential Securities) and other persons
which distribute shares of the Fund (including Class Z shares). Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
Fee Waivers/Subsidies. PIFM may from time to time waive all or a portion of
its management fee and subsidize all or a portion of the operating expenses of
the Fund. In addition, the Distributor has contractually agreed to waive a
portion of its distribution fees for the Class A shares as described above.
Fee waivers and subsidies will increase the Fund's total return.
NASD Maximum Sales Charge Rule. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred
sales charges and asset-based sales charges to 6.25% of total gross sales of
each class of shares.
B-21
<PAGE>
Interest charges on unreimbursed distribution expenses equal to the prime rate
plus one percent per annum may be added to the 6.25% limitation. Sales from
the reinvestment of dividends and distributions are not included in the
calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of the Fund may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of total gross sales of any
class, all sales charges on shares of that class would be suspended.
(c) Other Service Providers
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Subcustodians
provide custodial services for the Fund's foreign assets held outside the
United States.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $10.00
per shareholder account, a new account set-up fee of $2.00 for each manually
established shareholder account and a monthly inactive zero balance account
fee of $.20 per shareholder account. PMFS is also reimbursed for its out-of-
pocket expenses, including but not limited to postage, stationery, printing,
allocable communication expenses and other costs.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity
audits the Fund's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, futures
and options on securities and futures for the Fund, the selection of brokers,
dealers and futures commission merchants to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section,
the term "Manager" includes the Subadviser. Broker-dealers may receive
brokerage commissions on Fund portfolio transactions, including options and
the purchase and sale of underlying securities upon the exercise of options.
Orders may be directed to any broker or futures commission merchant including,
to the extent and in the manner permitted by applicable law, Prudential
Securities and its affiliates. Brokerage commissions on United States
securities, options and futures exchanges or boards of trade are subject to
negotiation between the Manager and the broker or futures commission merchant.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to
the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments and U.S. Government agency securities may be
purchased directly from the issuer, in which case no commissions or discounts
are paid. The Fund will not deal with Prudential Securities or any affiliate
in any transaction in which Prudential Securities or any affiliate acts as
principal, except in accordance with rules of the Commission. Thus, it will
not deal in the over-the-counter market with Prudential Securities acting as
market maker, and it will not execute a negotiated trade with Prudential
Securities if execution involves Prudential Securities' acting as principal
with respect to any part of the Fund's order.
In placing orders for portfolio securities of the Fund, the Manager's
overriding objective is to obtain the best possible combination of price and
efficient execution. The Manager seeks to effect each transaction at a price
and commission that provides the most favorable total cost or proceeds
reasonably attainable in the circumstances. The factors that the Manager may
consider in selecting a particular broker, dealer or futures commission
merchant (firms) are the Manager's knowledge of negotiated commission rates
currently available and other current transaction costs; the nature of the
portfolio transaction; the size of the transaction; the desired timing of the
trade; the activity existing and expected in the market for the particular
transaction;
B-22
<PAGE>
confidentiality; the execution, clearance and settlement capabilities of the
firms; the availability of research and research related services provided
through such firms; the Manager's knowledge of the financial stability of the
firms; the Manager's knowledge of actual or apparent operational problems of
firms; and the amount of capital, if any, that would be contributed by firms
executing the transaction. Given these factors, the Fund may pay transaction
costs in excess of that which another firm might have charged for effecting
the same transaction.
When the Manager selects a firm that executes orders or is a party to
portfolio transactions, relevant factors taken into consideration are whether
that firm has furnished research and research related products and/or
services, such as research reports, research compilations, statistical and
economic data, computer data bases, quotation equipment and services, research
oriented computer-software, hardware and services, reports concerning the
performance of accounts, valuations of securities, investment related
periodicals, investment seminars and other economic services and consultants.
Such services are used in connection with some or all of the Manager's
investment activities; some of such services, obtained in connection with the
execution of transactions for one investment account, may be used in managing
other accounts, and not all of these services may be used in connection with
the Fund.
The Manager maintains an internal allocation procedure to identify those
firms who have provided it with research and research related products and/or
services, and the amount that was provided, and to endeavor to direct
sufficient commissions to them to ensure the continued receipt of those
services that the Manager believes provides a benefit to the Fund and its
other clients. The Manager makes a good faith determination that the research
and/or service is reasonable in light of the type of service provided and the
price and execution of the related portfolio transactions.
When the Manager deems the purchase or sale of equities to be in the best
interests of the Fund or its other clients, including Prudential, the Manager
may, but is under no obligation to, aggregate the transactions in order to
obtain the most favorable price or lower brokerage commissions and efficient
execution. In such event, allocation of the transactions, as well as the
expenses incurred in the transaction, will be made by the Manager in the
manner it considers to be most equitable and consistent with its fiduciary
obligations to its clients. The allocation of orders among firms and the
commission rates paid are reviewed periodically by the Fund's Trustees.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities or any affiliate, during the
existence of the syndicate, is a principal underwriter (as defined in the
Investment Company Act), except in accordance with rules of the Commission.
This limitation, in the opinion of the Fund, will not significantly affect the
Fund's ability to pursue its present investment objective. However, in the
future in other circumstances, the Fund may be at a disadvantage because of
this limitation in comparison to other funds with similar objectives but not
subject to such limitations.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by
Prudential Securities (or any affiliate) must be reasonable and fair compared
to the commissions, fees or other remuneration paid to other firms in
connection with comparable transactions involving similar securities or
futures being purchased or sold on an exchange or board of trade during a
comparable period of time. This standard would allow Prudential Securities (or
any affiliate) to receive no more than the remuneration which would be
expected to be received by an unaffiliated firm in a commensurate arm's-length
transaction. Furthermore, the Trustees of the Fund, including a majority of
the non-interested Trustees, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to
Prudential Securities (or any affiliate) are consistent with the foregoing
standard. In accordance with Section 11(a) of the Securities Exchange Act of
1934, as amended, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless
the Fund has expressly authorized the retention of such compensation.
Prudential Securities must furnish to the Fund at least annually a statement
setting forth the total amount of all compensation retained by Prudential
Securities from transactions effected for the Fund during the applicable
period. Brokerage and futures transactions with Prudential Securities (or any
affiliate) are also subject to such fiduciary standards as may be imposed upon
Prudential Securities (or such affiliate) by applicable law.
B-23
<PAGE>
The table below sets forth information concerning the payment of commissions
by the Fund, including the commissions paid to Prudential Securities, for the
three years ended October 31, 1999.
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Total brokerage commissions paid by the
Fund...................................... $2,446,512 $2,042,389 $1,978,946
Total brokerage commissions paid to
Prudential Securities..................... $ 81,343 $ 166,500 $ 197,700
Percentage of total brokerage commissions
paid to Prudential Securities............. 4.6% 8.2% 10.0%
</TABLE>
The Fund effected approximately 4.6% of the total dollar amount of its
transactions involving the payment of commissions to Prudential Securities
during the year ended October 31, 1999. Of the total brokerage commissions
paid during that period, $82,014 (or 3.35%) were paid to firms which provide
research, statistical or other services to PI. PIFM has not separately
identified a portion of such brokerage commissions as applicable to the
provision of such research, statistical or other services.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company
Act) and their parents at October 31, 1999. As of October 31, 1999, the Fund
held equity securities of the following: Lehman Brothers Holdings, Inc.,
$113,913,506; PaineWebber Group, Inc., $53,435,475; Bear, Stearns & Co., Inc.,
$42,516,520 and Edwards (A.G.), Inc., $9,695,156. The Fund also held debt
securities of the following: Bear, Stearns & Co. Inc., $3,839,000; Goldman,
Sachs & Co., $2,992,000; Morgan (J.P.) Securities, Inc., $3,839,000 and
Salomon Smith Barney Inc., $3,839,000.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue an unlimited number of shares of beneficial
interest, $.01 par value per share divided into four classes, designated Class
A, Class B, Class C and Class Z shares, initially all of one series. Each
class of par value shares represents an interest in the same assets of the
Fund and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except for Class
Z shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (2) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to
its arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. In accordance with the
Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine. The voting rights of the shareholders of a series or class can be
modified only by the majority vote of shareholders of that series or class.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share
of each class is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares (with the exception of Class Z shares,
which are not subject to any distribution or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of the Fund is
entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares
generally bear higher distribution expenses than Class A shares, the
liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders and to Class Z shareholders, whose shares are not
subject to any distribution and/or service fees.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Trustees is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon the vote of 10% of
the Fund's outstanding shares for the purpose of voting on the removal of one
or more Trustees or to transact any other business.
The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business corporation and a
B-24
<PAGE>
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of
the Fund beyond the amount of their investment in the Fund. The Declaration of
Trust of the Fund provides that shareholders will not be subject to any
personal liability for acts or obligations of the Fund and that every written
obligation, contract, instrument or undertaking made by the Fund will contain
a provision to the effect that shareholders are not individually bound
thereunder.
Massachusetts counsel for the Fund have advised the Fund that no personal
liability with respect to contract obligations will attach to the shareholders
under any undertaking containing such provisions when adequate notice of such
provision is given, except possibly in a few jurisdictions. With respect to
all types of claims in the latter jurisdictions and with respect to tort
claims, contract claims when the provision referred to is omitted from the
undertaking, claims for taxes and certain statutory liabilities, a shareholder
may be held personally liable to the extent that claims are not satisfied by
the Fund. However, upon payment of any such liability, the shareholder will be
entitled to reimbursement from the general assets of the Fund. The Trustees
intend to conduct the operations of the Fund in such a way as to avoid, to the
extent possible, ultimate liability of the shareholders for liabilities of the
Fund.
Under the Declaration of Trust, the Trustees may authorize the creation of
additional series of shares (the proceeds of which would be invested in
separate, independently managed portfolios with distinct investment objectives
and policies and share purchase, redemption and net asset value procedures)
with such preferences, privileges, limitations and voting and dividend rights
as the Trustees may determine. All consideration received by the Fund for
shares of any additional series, and all assets in which such consideration is
invested, would belong to that series (subject only to the rights of creditors
of that series) and would be subject to the liabilities related thereto. Under
the Investment Company Act, shareholders of any additional series of shares
would normally have to approve the adoption of any advisory contract relating
to such series and of any changes in the investment policies related thereto.
The Trustees do not intend to authorize additional series at the present time.
The Trustees have the power to alter the number and the terms of office of
the Trustees and they may at any time lengthen their own terms or make their
terms of unlimited duration and appoint their own successors, provided that
always at least a majority of the Trustees have been elected by the
shareholders of the Fund. The voting rights of shareholders are not
cumulative, so that holders of more than 50 percent of the shares voting can,
if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A or
Class C shares) or (2) on a deferred basis (Class B or Class C shares). Class
Z shares of the Fund are offered to a limited group of investors at NAV
without any sales charges.
Purchase by Wire. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free)
to receive an account number. The following information will be requested:
your name, address, tax identification number, fund and class election,
dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by
wire to State Street Bank and Trust Company (State Street), Boston,
Massachusetts, Custody and Shareholder Services Division, Attention:
Prudential Value Fund, specifying on the wire the account number assigned by
PMFS and your name and identifying the class in which you are eligible to
invest (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Value Fund,
Class A, Class B, Class C or Class Z shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by
wire is $1,000.
B-25
<PAGE>
Issuance of Fund Shares for Securities
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objective and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange
or market, and (d) are approved by the Fund's investment adviser.
Specimen Price Make-up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares of the Fund are sold at a maximum sales charge of
5%, Class C* shares are sold with a 1% sales charge, and Class B* and Class Z
shares of the Fund are sold at NAV. Using the NAV at April 30, 2000, the
maximum offering price of the Fund's shares is as follows:
<TABLE>
<S> <C>
Class A
Net asset value and redemption price per Class A share............. $16.21
Maximum sales charge (5% of offering price)........................ .85
------
Maximum offering price to public................................... $17.06
======
Class B
Net asset value, redemption price and offering price per Class B
share*............................................................ $16.15
======
Class C
Net asset value and redemption price per Class C share*............ $16.15
Sales charge (1% of offering price)................................ .16
------
Offering price to public........................................... $16.31
======
Class Z
Net asset value, redemption price and offering price per Class Z
share............................................................. $16.23
======
</TABLE>
----------
*Class B and Class C shares are subject to a contingent deferred
sales charge on certain redemptions.
Selecting a Purchase Alternative
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an initial sales charge of 5% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for longer than 4 years, but less than
5 years, and do not qualify for a reduced sales charge on Class A shares, you
should consider purchasing Class B or Class C shares over Class A shares. This
is because the initial sales charge plus the cumulative annual distribution-
related fee on Class A shares would exceed those of the Class B and Class C
shares if you redeem your investment during this time period. In addition,
more of your money would be invested initially in the case of Class C shares,
because of the relatively low initial sales charge, and all of your money
would be invested initially in the case of Class B shares, which are sold at
NAV.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual distribution-
related fee on Class A shares would be less than those of the Class B and
Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of
purchase.
B-26
<PAGE>
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 6 years in the case of Class B shares and 5 years in the case of
Class C shares for the higher cumulative annual distribution-related fee on
those shares plus, in the case of Class C shares, the 1% initial sales charge
to exceed the initial sales charge plus the cumulative annual distribution-
related fees on Class A shares. This does not take into account the time value
of money, which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
Reduction and Waiver of Initial Sales Charge--Class A Shares
Benefit Plans. Certain group retirement and savings plans may purchase Class
A shares without the initial sales charge if they meet the required minimum
for amount of assets, average account balance or number of eligible employees.
For more information about these requirements, call Prudential at (800) 353-
2847.
Other Waivers. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:
. officers of the Prudential mutual funds (including the Fund),
. employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer
Agent,
. employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer,
. Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries,
. members of the Board of Directors of Prudential,
. real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the
Transfer Agent,
. registered representatives and employees of brokers who have entered
into a selected dealer agreement with the Distributor provided that
purchases at NAV are permitted by such person's employer,
. investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with
proceeds of a redemption of shares of any open-end non-money market fund
sponsored by the financial adviser's previous employer (other than a
fund which imposes a distribution or service fee of .25 of 1% or less)
and (3) the financial adviser served as the client's broker on the
previous purchase,
. investors in Individual Retirement Accounts, provided the purchase is
made in a directed rollover to such Individual Retirement Account or
with the proceeds of a tax-free rollover of assets from a Benefit Plan
for which Prudential provides administrative or recordkeeping services
and further provided that such purchase is made within 60 days of
receipt of the Benefit Plan distribution,
. orders placed by broker-dealers, investment advisers or financial
planners who have entered into an agreement with the Distributor, who
place trades for their own accounts or the accounts of their clients and
who charge a management, consulting or other fee for their services
(e.g., mutual fund "wrap" or asset allocation programs), and
. orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the
accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner and the broker-dealer,
investment adviser or financial planner charges its clients a separate
fee for its services (e.g., mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring fee-
based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one
class of shares in the Fund in connection with different pricing options for
their programs. Investors should consider carefully any separate transaction
and other fees charged by these programs in connection with investing in each
available share class before selecting a share class.
B-27
<PAGE>
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation
of your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential mutual funds, the
purchases may be combined to take advantage of the reduced sales charges
applicable to larger purchases. See "How to Buy, Sell and Exchange Shares of
the Fund--Reducing or Waiving Class A's Initial Sales Charge" in the
Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
. an individual
. the individual's spouse, their children and their parents
. the individual's and spouse's Individual Retirement Account (IRA)
. any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners)
. a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
. a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse
. one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that
employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the
investor's holdings. The Combined Purchase and Cumulative Purchase Privilege
does not apply to individual participants in any retirement or group plans.
Letters of Intent. Reduced sales charges are also available to investors (or
an eligible group of related investors) who enter into a written Letter of
Intent providing for the purchase, within a thirteen-month period, of shares
of the Fund and shares of other Prudential mutual funds (Investment Letter of
Intent). Retirement and group plans no longer qualify to purchase Class A
shares at NAV by entering into a Letter of Intent.
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential mutual funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
or its affiliates and through your broker will not be aggregated to determine
the reduced sales charge.
An Investment Letter of Intent permits a purchaser to establish a total
investment goal to be achieved by any number of investments over a thirteen-
month period. Each investment made during the period will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. Escrowed Class A shares totaling 5% of the dollar amount of
the Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of an Investment Letter of Intent may be back-
dated up to 90 days, in order that any investments made during this 90-day
period, valued at the purchaser's cost, can be applied to the fulfillment of
the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser is
required to pay the difference between the sales charge otherwise applicable
to the purchases made during this period and the sales charge actually paid.
Such payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain
B-28
<PAGE>
such difference. If the goal is exceeded in an amount which qualifies for a
lower sales charge, a price adjustment is made by refunding to the purchaser
the amount of excess sales charge, if any, paid during the thirteen-month
period. Investors electing to purchase Class A shares of the Fund pursuant to
a Letter of Intent should carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be
granted subject to confirmation of the investor's holdings. Letters of Intent
are not available to individual participants in any retirement or group plans.
Class B Shares
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following
receipt of an order in proper form by the Transfer Agent, your broker or the
Distributor. Although there is no sales charge imposed at the time of
purchase, redemptions of Class B shares may be subject to a CDSC. See "Sale of
Shares--Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates
the ability of the Fund to sell the Class B shares without an initial sales
charge being deducted at the time of purchase. The Distributor anticipates
that it will recoup its advancement of sales commissions from the combination
of the CDSC and the distribution fee.
Class C Shares
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other
persons which distribute Class C shares a sales commission of up to 2% of the
purchase price at the time of the sale.
Waiver of Initial Sales Charge--Class C Shares
Benefit Plans. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at
(800) 353-2847.
Investment of Redemption Proceeds from Other Investment Companies. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered
investment company which were not held through an account with any Prudential
affiliate. Such purchases must be made within 60 days of the redemption.
Investors eligible for this waiver include: (1) investors purchasing shares
through an account at Prudential Securities; (2) investors purchasing shares
through an ADVANTAGE Account or an Investor Account with Prusec; and (3)
investors purchasing shares through other brokers. This waiver is not
available to investors who purchase shares directly from the Transfer Agent.
You must notify the Transfer Agent directly or through your broker if you are
entitled to this waiver and provide the Transfer Agent with such supporting
documents as it may deem appropriate.
Class Z Shares
Benefit Plans. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance
or number of eligible employees. For more information about these
requirements, call Prudential at (800) 353-2847.
Mutual Fund Programs. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group
relating to:
. Mutual fund "wrap" or asset allocation programs where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
. Mutual fund "supermarket" programs where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
B-29
<PAGE>
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
Other Types of Investors. Class Z shares also are available for purchase by
the following categories of investors:
. certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential Mutual Funds are an available investment option,
. current and former Director/Trustees of the Prudential mutual funds
(including the Fund), or
. Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers, financial advisers and other
persons which distribute shares a finder's fee, from its own resources, based
on a percentage of the net asset value of shares sold by such persons.
Rights of Accumulation
Reduced sales charges are also available through rights of accumulation,
under which an investor or an eligible group of related investors, as
described above under "Combined Purchase and Cumulative Purchase Privilege,"
may aggregate the value of their existing holdings of shares of the Fund and
shares of other Prudential mutual funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through your broker will not be aggregated to determine the
reduced sales charge. Rights of accumulation may be applied across the classes
of the Prudential mutual funds. However, the value of existing holdings for
purposes of determining the reduced sales charge is calculated using the
maximum offering price (NAV plus maximum sales charge) as of the previous
business day.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the investor is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investor's
holdings. Rights of accumulation are not available to individual participants
in any retirement or group plans.
Sale of Shares
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charges"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for that day (that
is, 4:15 P.M., New York time) in order to receive that day's NAV. Your broker
will be responsible for furnishing all necessary documentation to the
Distributor and may charge you for its services in connection with redeeming
shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your
Prudential Securities financial adviser.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates must be received by the Transfer Agent, the
Distributor or your broker in order for the redemption request to be
processed. If redemption is requested by a corporation, partnership, trust or
fiduciary, written evidence of authority acceptable to the Transfer Agent must
be submitted before such request will be accepted. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services LLC, Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010, the
Distributor, or to your broker.
Signature Guarantee. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4)
are to be paid to a corporation, partnership, trust or fiduciary, and your
shares are held directly with the Transfer Agent, the signature(s) on the
B-30
<PAGE>
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office
manager of most Prudential Insurance and Financial Services or Preferred
Services offices. In the case of redemptions from a PruArray Plan, if the
proceeds of the redemption are invested in another investment option of the
plan in the name of the record holder and at the same address as reflected in
the Transfer Agent's records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker, payment for shares presented for redemption will
be credited to your account at your broker, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(1) when the New York Stock Exchange is closed for other than customary
weekends and holidays, (2) when trading on such Exchange is restricted, (3)
when an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
(4) during any other period when the Commission, by order, so permits;
provided that applicable rules and regulations of the Commission shall govern
as to whether the conditions prescribed in (2), (3) or (4) exist.
Redemption in Kind. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make
payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in
the same manner as in a regular redemption. If your shares are redeemed in
kind, you would incur transaction costs in converting the assets into cash.
The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund
during any 90-day period for any one shareholder.
Involuntary Redemption. In order to reduce expenses of the Fund, the
Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose
account has a net asset value of less than $500 due to a redemption. The Fund
will give such shareholders 60 days' prior written notice in which to purchase
sufficient additional shares to avoid such redemption. No CDSC will be imposed
on any such involuntary redemption.
90-day Repurchase Privilege. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the same Fund at the NAV
next determined after the order is received, which must be within 90 days
after the date of the redemption. Any CDSC paid in connection with such
redemption will be credited (in shares) to your account. (If less than a full
repurchase is made, the credit will be on a pro rata basis.) You must notify
the Transfer Agent, either directly or through The Distributor or your broker,
at the time the repurchase privilege is exercised to adjust your account for
the CDSC you previously paid. Thereafter, any redemptions will be subject to
the CDSC applicable at the time of the redemption. See "Contingent Deferred
Sales Charge" below. Exercise of the repurchase privilege will generally not
affect federal tax treatment of any gain realized upon redemption. However, if
the redemption was made within a 30 day period of the repurchase and if the
redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, may not be allowed for federal income tax purposes.
Contingent Deferred Sales Charge
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C
shares redeemed within 18 months of purchase (one year in the case of shares
purchased before November 2, 1998) will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you.
The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in
the case of Class B shares, and 18 months, in the case of Class C shares (one
year for Class C shares purchased before November 2, 1998). A CDSC will be
applied on the lesser of the original purchase price or the current value of
the shares being redeemed. Increases in the value of your shares or shares
acquired through reinvestment of dividends or distributions are not subject to
a CDSC. The amount of any CDSC will be paid to and retained by the
Distributor.
B-31
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month. The CDSC will be calculated from the first day of the month
after the initial purchase, excluding the time shares were held in a money
market fund.
The following table sets forth the rates of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
Contingent Deferred Sales
Charge as a Percentage
Year Since Purchase of Dollars Invested or
Payment Made Redemption Proceeds
------------------- -------------------------
<S> <C>
First......................................... 5.0%
Second........................................ 4.0%
Third......................................... 3.0%
Fourth........................................ 2.0%
Fifth......................................... 1.0%
Sixth......................................... 1.0%
Seventh....................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments
for the purchase of Fund shares made during the preceding six years (five
years for Class B shares purchased prior to January 22, 1990) and 18 months
for Class C shares (one year for Class C shares bought before November 2,
1998); then of amounts representing the cost of shares held beyond the
applicable CDSC period; and finally, of amounts representing the cost of
shares held for the longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided
to redeem $500 of your investment. Assuming at the time of the redemption the
NAV had appreciated to $12 per share, the value of your Class B shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 4% (the applicable rate in the
second year after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
Waiver of Contingent Deferred Sales Charge--Class B Shares. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy at the time of death or initial determination of disability, provided
that the shares were purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential Mutual Funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable
Value Fund.
Systematic Withdrawal Plan. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12%
of the total dollar amount subject to the CDSC may be redeemed without charge.
The Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for
B-32
<PAGE>
shares purchased prior to March 1, 1997, on March 1 of the current year. The
CDSC will be waived (or reduced) on redemptions until this threshold 12% is
reached.
In addition, the CDSC will be waived on redemptions of shares held by
Trustees of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may
deem appropriate. The waiver will be granted subject to confirmation of your
entitlement.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
Category of Waiver Required Documentation
Death A copy of the shareholder's death
certificate or, in the case of a
trust, a copy of the grantor's death
certificate, plus a copy of the
trust agreement identifying the
grantor.
Disability--An individual will be A copy of the Social Security
considered disabled if he or she is Administration award letter or a
unable to engage in any substantial letter from a physician on the
gainful activity by reason of any physician's letterhead stating that
medically determinable physical or the shareholder (or, in the case of
mental impairment which can be a trust, the grantor (a copy of the
expected to result in death or to be trust agreement identifying the
of long-continued and indefinite grantor will be required as well))
duration. is permanently disabled. The letter
must also indicate the date of
disability.
Distribution from an IRA or 403(b) A copy of the distribution form from
Custodial Account the custodial firm indicating (i)
the date of birth of the shareholder
and (ii) that the shareholder is
over age 59 1/2 and is taking a
normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the
reason for the distribution.
Excess Contributions A letter from the shareholder (for
an IRA) or the plan
administrator/trustee on company
letterhead indicating the amount of
the excess and whether or not taxes
have been paid.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
B-33
<PAGE>
Quantity Discount--Class B Shares Purchased Prior to August 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchased an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares
of the Fund following the second purchase was $550,000, the quantity discount
would be available for the second purchase of $450,000 but not for the first
purchase of $100,000. The quantity discount will be imposed at the following
rates depending on whether the aggregate value exceeded $500,000 or $1
million:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of Dollars Invested
or Redemption Proceeds
--------------------------------------
Year Since Purchase
Payment Made $500,001 to $1 million Over $1 million
------------------- ---------------------- ---------------
<S> <C> <C>
First.......................... 3.0% 2.0%
Second......................... 2.0% 1.0%
Third.......................... 1.0% 0%
Fourth and thereafter.......... 0% 0%
</TABLE>
You must notify the Fund's Distributor or Transfer Agent either directly or
through Prudential Securities or Prusec, at the time of redemption, that you
are entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
Waiver of Contingent Deferred Sales Charge--Class C Shares
Benefit Plans. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with
Prudential provide administrative or recordkeeping services. The CDSC also
will be waived for certain redemptions by benefit plans sponsored by
Prudential and its affiliates. For more information, call Prudential at (800)
353-2847.
Conversion Feature--Class B Shares
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected
at relative net asset value without the imposition of any additional sales
charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will
be determined on each conversion date in accordance with the following
formula: (i) the ratio of (a) the amounts paid for Class B shares purchased at
least seven years prior to the conversion date to (b) the total amount paid
for all Class B shares purchased and then held in your account (ii) multiplied
by the total number of Class B shares purchased and then held in your account.
Each time any Eligible Shares in your account convert to Class A shares, all
shares or amounts representing Class B shares then in your account that were
acquired through the automatic reinvestment of dividends and other
distributions will convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible
Shares calculated as described above will generally be either more or less
than the number of shares actually purchased approximately seven years before
such conversion date. For example, if 100 shares were initially purchased at
$10 per share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to
shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted.
B-34
<PAGE>
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been
made on the last day of the month, or for Class B shares acquired through
exchange, or a series of exchanges, on the last day of the month in which the
original payment for purchases of such Class B shares was made. For Class B
shares previously exchanged for shares of a money market fund, the time period
during which such shares were held in the money market fund will be excluded.
For example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase
of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class
Z shares will not constitute "preferential dividends" under the Internal
Revenue Code and (2) that the conversion of shares does not constitute a
taxable event. The conversion of Class B shares into Class A shares may be
suspended if such opinions or rulings are no longer available. If conversions
are suspended, Class B shares of the Fund will continue to be subject,
possibly indefinitely, to their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for
full shares and may be redeposited in the Account at any time. There is no
charge to the investor for issuance of a certificate. The Fund makes available
to its shareholders the following privileges and plans.
Automatic Reinvestment of Dividends and/or Distributions
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net
asset value per share. An investor may direct the Transfer Agent in writing
not less than five full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than reinvested.
In the case of recently purchased shares for which registration instructions
have not been received on the record date, cash payment will be made directly
to the broker. Any shareholder who receives dividends or distributions in cash
may subsequently reinvest any such dividend or distribution at NAV by
returning the check or the proceeds to the Transfer Agent within 30 days after
the payment date. Such reinvestment will be made at the NAV per share next
determined after receipt of the check or proceeds by the Transfer Agent.
Shares purchased with reinvested dividends and/or distributions will not be
subject to any CDSC upon redemption.
Exchange Privilege
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential mutual funds,
including one or more specified money market funds, subject in each case to
the minimum investment requirements of such funds. Shares of such other
Prudential mutual funds may also be exchanged for shares of the Fund. All
exchanges are made on the basis of the relative NAV next determined after
receipt of an order in proper form. An exchange will be treated as a
redemption and purchase for tax purposes. Shares may be exchanged for shares
of another fund only if shares of such fund may legally be sold under
applicable state laws. For retirement and group plans having a limited menu of
Prudential mutual funds, the exchange privilege is available for those funds
eligible for investment in the particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the
Transfer Agent and hold shares in non-certificate form. Thereafter, you may
call the Fund at (800) 225-1852 to execute a telephone exchange of shares, on
weekdays, except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New
York time. For your protection and to prevent fraudulent exchanges, your
telephone call will be recorded and you will be asked to
B-35
<PAGE>
provide your personal identification number. A written confirmation of the
exchange transaction will be sent to you. Neither the Fund nor its agents will
be liable for any loss, liability or cost which results from acting upon
instructions reasonably believed to be genuine under the foregoing procedures.
All exchanges will be made on the basis of the relative NAV of the two funds
next determined after the request is received in good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates must be returned in order for the
shares to be exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
Class A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential mutual funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the exchange privilege only to acquire
Class A shares of the Prudential mutual funds participating in the exchange
privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
Class B and Class C. Shareholders of the Fund may exchange their Class B and
Class C shares of the Fund for Class B and Class C shares, respectively, of
certain other Prudential mutual funds and shares of Prudential Special Money
Market Fund, Inc., a money market fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the redemption of the Class B and
Class C shares acquired as a result of the exchange. The applicable sales
charge will be that imposed by the fund in which shares were initially
purchased and the purchase date will be deemed to be the first day of the
month after the initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at
the time of exchange. Upon subsequent redemption from such money market fund
or after re-exchange into the Fund, such shares will be subject to the CDSC
calculated without regard to the time such shares were held in the money
market fund. In order to minimize the period of time in which shares are
subject to a CDSC, shares exchanged out of the money market fund will be
exchanged on the basis of their remaining holding periods, with the longest
remaining holding periods being transferred first. In measuring the time
period shares are held in a money market fund and "tolled" for purposes of
calculating the CDSC holding period, exchanges are deemed to have been made on
the last day of the month. Thus, if shares are exchanged into the Fund from a
money market fund during the month (and are held in the Fund at the end of the
month), the entire month will be included in the CDSC holding period.
Conversely, if shares are exchanged into a money market fund prior to the last
day of the month (and are held in the money market fund on the last day of the
month), the entire month will be excluded
B-36
<PAGE>
from the CDSC holding period. For purposes of calculating the seven year
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares
of any fund participating in the Class B or Class C exchange privilege that
were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C shares of other funds, respectively, without
being subject to any CDSC.
Class Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.
Special Exchange Privileges. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for
shareholders who qualify to purchase Class Z shares. Under this exchange
privilege, amounts representing any Class B and Class C shares which are not
subject to a CDSC held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the net asset
value above the total amount of payments for the purchase of Class B or Class
C shares and (3) amounts representing Class B or Class C shares held beyond
the applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntarily or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
net asset value. Similarly, participants in Prudential Securities' 401(k) Plan
for which the Fund's Class Z shares is an available option and who wish to
transfer their Class Z shares out of the Prudential Securities 401(k) Plan
following separation from service (that is, voluntary or involuntary
termination of employment or retirement) will have their Class Z shares
exchanged for Class A shares at NAV.
The Prudential Securities Cash Balance Pension Plan may only exchange its
Class Z shares for Class Z shares of those Prudential mutual funds which
permit investment by the Prudential Securities Cash Balance Pension Plan.
Additional details about the exchange privilege and prospectuses for each of
the Prudential mutual funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
Dollar Cost Averaging
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more
shares when the price is low and fewer shares when the price is high. The
average cost per share is lower than it would be if a constant number of
shares were bought at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at
a private college could reach $210,000 and over $90,000 at a public
university./1/
B-37
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals./2/
<TABLE>
<CAPTION>
Period of
Monthly Investments: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years.................................... $ 110 $ 165 $ 220 $ 275
20 Years.................................... 176 264 352 440
15 Years.................................... 296 444 592 740
10 Years.................................... 555 833 1,110 1,388
5 Years..................................... 1,371 2,057 2,742 3,428
</TABLE>
See "Automatic Investment Plan."
----------
/1/Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
/2/The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
Automatic Investment Plan (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account
or brokerage account (including a Prudential Securities Command Account) to be
debited to invest specified dollar amounts in shares of the Fund. The
investor's bank must be a member of the Automatic Clearing House System. Share
certificates are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
Systematic Withdrawal Plan
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your broker. The withdrawal plan provides
for monthly, quarterly, semi-annual or annual redemption checks in any amount,
except as provided below, up to the value of the shares in the shareholder's
account. Withdrawals of Class B or Class C shares may be subject to a CDSC.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and (3)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan.
The Transfer Agent, the Distributor or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic withdrawal payment. The systematic withdrawal plan
may be terminated at any time, and the Distributor reserves the right to
initiate a fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If systematic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must generally be recognized for federal income tax
purposes. In addition, withdrawals made concurrently with purchases of
additional shares are inadvisable because of the sales charges applicable to
(1) the purchase of Class A and Class C shares and (2) the redemption of Class
B and
B-38
<PAGE>
Class C shares. Each shareholder should consult his or her own tax adviser
with regard to the tax consequences of the systematic withdrawal plan,
particularly if used in connection with a retirement plan.
Tax-Deferred Retirement Plans
Various tax-deferred retirement plans, including a 401(k) plan, self-
directed individual retirement accounts and "tax-deferred accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from the Distributor or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
Tax-Deferred Retirement Accounts
Individual Retirement Accounts. An individual retirement account (IRA)
permits the deferral of federal income tax on income earned in the account
until the earnings are withdrawn. The following chart represents a comparison
of the earnings in a personal savings account with those in an IRA, assuming a
$2,000 annual contribution, an 8% rate of return and a 39.6% federal income
tax bracket and shows how much more retirement income can accumulate within an
IRA as opposed to a taxable individual savings account.
Tax-Deferred Compounding/1/
<TABLE>
<CAPTION>
Contributions Personal
Made Over: Savings IRA
------------- -------- --------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
----------
/1/The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions required
under the Internal Revenue Code will not be subject to tax upon withdrawal
from the account.
Mutual Fund Programs
From time to time, the Fund may be included in a mutual fund program with
other Prudential mutual funds. Under such a program, a group of portfolios
will be selected and thereafter marketed collectively. Typically, these
programs are created with an investment theme, such as, to seek greater
diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund
may waive or reduce the minimum initial investment requirements in connection
with such a program.
The mutual funds in the program may be purchased individually or as part of
a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, individuals should consult their financial
adviser concerning the appropriate blend of portfolios for them. If investors
elect to purchase the individual mutual funds that constitute the program in
an investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The Fund's net asset value per share or NAV is determined by subtracting its
liabilities from the value of its assets and dividing the remainder by the
number of outstanding shares. NAV is calculated separately for each class. The
Fund will compute
B-39
<PAGE>
its NAV at 4:15 P.M., New York time, on each day the New York Stock Exchange
is open for trading except on days on which no orders to purchase, sell or
redeem Fund shares have been received or days on which changes in the value of
the Fund's portfolio securities do not affect NAV. In the event the New York
Stock Exchange closes early on any business day, the NAV of the Fund's shares
shall be determined at the time between such closing and 4:15 P.M., New York
time. The New York Stock Exchange is closed on the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Trustees, the value of investments
listed on a securities exchange and NASDAQ National Market System securities
(other than options on stock and stock indexes) are valued at the last sale
price of such exchange system on the day of valuation or, if there was no sale
on such day, the mean between the last bid and asked prices on such day, or at
the bid price on such day in the absence of an asked price. Corporate bonds
(other than convertible debt securities) and U.S. Government securities that
are actively traded in the over-the-counter market, including listed
securities for which the primary market is believed by the Manager in
consultation with the Subadviser to be over-the-counter, are valued on the
basis of valuations provided by an independent pricing agent or principal
market maker which uses information with respect to transactions in bonds,
quotations from bond dealers, agency ratings, market transactions in
comparable securities and various relationships between securities in
determining value. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed by the Manager in consultation with the Subadviser to be
over-the-counter, are valued at the mean between the last reported bid and
asked prices provided by principal market makers. Options on stock and stock
indexes traded on an exchange are valued at the mean between the most recently
quoted bid and asked prices on the respective exchange and futures contracts
and options thereon are valued at their last sale prices as of the close of
trading on the applicable commodities exchange or board of trade or, if there
was no sale on the applicable commodities exchange or board of trade on such
day, at the mean between the most recently quoted bid and asked prices on such
exchange or board of trade. Quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents at the current rate obtained
from a recognized bank or dealer, and foreign currency forward contracts are
valued at the current cost of covering or offsetting such contacts. Should an
extraordinary event, which is likely to affect the value of the security,
occur after the close of an exchange on which a portfolio security is traded,
such security will be valued at fair value considering factors determined in
good faith by the investment adviser under procedures established by and under
the general supervision of the Fund's Board of Trustees.
Securities or other assets for which reliable market quotations are not
readily available or for which the pricing agent or principal market maker
does not provide a valuation or methodology or provides a valuation or
methodology that, in the judgment of the Manager or Subadviser (or Valuation
Committee or Board of Trustees) does not represent fair value, are valued by
the Valuation Committee or Board of Trustees in consultation with the Manager
or Subadviser, including its portfolio manager, traders, and its research and
credit analysts, on the basis of the following factors: cost of the security,
transactions in comparable securities, relationships among various securities
and such other factors as may be determined by the Manager, Subadviser, Board
of Trustees or Valuation Committee to materially affect the value of the
security. Short-term debt securities are valued at cost, with interest accrued
or discount amortized to the date of maturity, if their original maturity was
60 days or less, unless this is determined by the Trustees not to represent
fair value. Short-term securities with remaining maturities of more than 60
days, for which market quotations are readily available, are valued at their
current market quotations as supplied by an independent pricing agent or
principal market maker.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger distribution-
related fee to which Class B and Class C shares are subject. The NAV of Class
Z shares will generally be higher than the NAV of Class A, Class B or Class C
shares as a result of the fact that the Class Z shares are not subject to any
distribution or service fee. It is expected, however, that the NAV of the four
classes will tend to converge immediately after the recording of dividends, if
any, which will differ by approximately the amount of the distribution and/or
service fee expense accrual differential among the classes.
B-40
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund is qualified as, intends to remain qualified as and has elected to
be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code. This relieves the Fund (but not its shareholders) from
paying federal income tax on income and capital gains which are distributed to
shareholders, and permits net capital gains of the Fund (that is, the excess
of net long-term capital gains over net short-term capital losses) to be
treated as long-term capital gains of the shareholders, regardless of how long
shareholders have held their shares in the Fund. Net capital gains of the Fund
which are available for distribution to shareholders will be computed by
taking into account any capital loss carryforward of the Fund.
Qualification of the Fund as a regulated investment company under the
Internal Revenue Code requires, among other things, that (a) the Fund derive
at least 90% of its annual gross income (without reduction for losses from the
sale or other disposition of securities or foreign currencies) from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of securities or options thereon or foreign currencies, or
other income (including but not limited to, gains from options, futures or
forward contracts) derived with respect to its business of investing in such
securities or currencies; (b) the Fund diversify its holdings so that, at the
end of each quarter of the taxable year, (i) at least 50% of the value of the
Fund's assets is represented by cash, U.S. government securities and other
securities limited in respect of any one issuer to an amount not greater than
5% of the value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities); and (c) the Fund distribute to its shareholders at
least 90% of its net investment income and net short-term capital gains (that
is, the excess of net short-term capital gains over net long-term capital
losses) in each year.
In addition, the Fund is required to distribute 98% of its ordinary income
in the same calendar year in which it is earned. The Fund is also required to
distribute during the calendar year 98% of the capital gain net income it
earned during the twelve months ending on October 31 of such calendar year. In
addition, the Fund must distribute during the calendar year all undistributed
ordinary income and undistributed capital gain net income from the prior year
or the twelve-month period ending on October 31 of such prior calendar year,
respectively. To the extent it does not meet these distribution requirements,
the Fund will be subject to a non-deductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the
Fund pays income tax is treated as distributed.
Gains or losses on sales of securities by the Fund generally will be treated
as long-term capital gains or losses if the securities have been held by it
for more than one year, except in certain cases where the Fund acquires a put
or writes a call thereon or otherwise holds an offsetting position with
respect to the securities. Other gains or losses on the sale of securities
will be short-term capital gains or losses. Gains and losses on the sale,
lapse or other termination of options on securities will be treated as gains
and losses from the sale of securities. If an option written by the Fund on
securities lapses or is terminated through a closing transaction, such as a
repurchase by the Fund of the option from its holder, the Fund will generally
realize short-term capital gain or loss. If securities are sold by the Fund
pursuant to the exercise of a call option written by it, the Fund will include
the premium received in the sale proceeds of the securities delivered in
determining the amount of gain or loss on the sale. Certain of the Fund's
transactions may be subject to wash sale, short sale, constructive sale, anti-
conversion and straddle provisions of the Internal Revenue Code which may,
among other things, require the Fund to defer recognition of losses. In
addition, debt securities acquired by the Fund may be subject to original
issue discount and market discount rules which, respectively, may cause the
Fund to accrue income in advance of the receipt of cash with respect to
interest or cause gains to be treated as ordinary income.
Special rules apply to most options on stock indexes, futures contracts and
options thereon, and foreign currency forward contracts in which the Fund may
invest. These investments will generally constitute Section 1256 contracts and
will be required to be "marked to market" for federal income tax purposes at
the end of the Fund's taxable year. Except with respect to certain foreign
currency forward contracts, 60% of any gain or loss recognized on these deemed
sales and on actual dispositions will be treated as long-term capital gain or
loss.
Gain or loss on the sale, lapse or other termination of options on stock and
on narrowly-based stock indexes will be capital gain or loss and will be long-
term or short-term depending on the holding period of the option. In addition,
positions which are part of a "straddle" will be subject to certain wash sale,
short sale and constructive sale provisions of the Internal Revenue Code. In
the case of a straddle, the Fund may be required to defer the recognition of
losses on positions it holds to the extent of any unrecognized gain on
offsetting positions held by the Fund.
B-41
<PAGE>
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time
the Fund actually collects such receivables or pays such liabilities are
treated as ordinary income or ordinary loss. Similarly, gains or losses on
foreign currency forward contracts or dispositions of debt securities
denominated in a foreign currency attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the security and the
date of disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Internal Revenue Code as "Section 988" gains or
losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income, rather than increasing or decreasing the amount of the Fund's net
capital gain. If Section 988 losses exceed other investment company taxable
income during a taxable year, the Fund would not be able to make any ordinary
dividend distributions, or distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders, rather than
as an ordinary dividend, reducing each shareholder's basis in his or her Fund
shares.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in
each share so received equal to the net asset value of a share of the Fund on
the reinvestment date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the dividends or distributions.
Furthermore, such dividends or distributions, although in effect a return of
capital, are subject to federal income taxes. Dividends and distributions may
be subject to state and local income taxes. Therefore, prior to purchasing
shares of the Fund, the investor should carefully consider the impact of
dividends or capital gains distributions which are expected to be or have been
announced.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period beginning 30 days before the disposition of shares. Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes
of calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a
nominee or fiduciary) who is a nonresident alien individual, a foreign
corporation or a foreign partnership (foreign shareholder) are subject to a
30% (or lower treaty rate) withholding tax upon the gross amount of the
dividends unless the dividends are effectively connected with a U.S. trade or
business conducted by the foreign shareholder. Net capital gain dividends paid
to a foreign shareholder are generally not subject to withholding tax. A
foreign shareholder will, however, be required to pay U.S. income tax on any
dividends and capital gain distributions which are effectively connected with
a U.S. trade or business of the foreign shareholder.
Dividends received by corporate shareholders are eligible for a dividends-
received deduction of 70% to the extent a Fund's income is derived from
qualified dividends received by the Fund from domestic corporations. Dividends
attributable to foreign corporations, interest income, capital and currency
gain, gain or loss from Section 1256 contracts (described above), and income
from certain other sources will not constitute qualified dividends. Individual
shareholders are not eligible for the dividends-received deduction.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A and Class Z shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be in the same amount
for Class A, Class B, Class C and Class Z shares. See "Net Asset Value."
The Fund may, from time to time, invest in Passive Foreign Investment
Companies (PFICs). A PFIC is a foreign corporation that, in general, meets
either of the following tests: (a) at least 75% of its gross income is passive
or (b) an average of at least 50% of its assets produce, or are held for the
production of, passive income. If the Fund acquires and holds stock in a PFIC
beyond the end of the year of its acquisition, the Fund will be subject to
federal income tax on a portion of any "excess distribution" received on the
stock or of any gain from disposition of the stock (collectively, PFIC
income), plus interest thereon, even if the Fund distributes the PFIC income
as a taxable dividend to its shareholders. The balance of the PFIC income will
be included in
B-42
<PAGE>
the Fund's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders.
The Fund may make a "mark-to-market" election with respect in any marketable
stock it holds of a PFIC. If the election is in effect, at the end of the
Fund's taxable year, the Fund will recognize the amount of gains, if any, as
ordinary income with respect to PFIC stock. No loss will be recognized on PFIC
stock, except to the extent of gains recognized in prior years. Alternatively,
the Fund, if it meets certain requirements, may elect to treat any PFIC in
which it invests as a "qualified electing fund," in which case, in lieu of the
foregoing tax and interest obligation, the Fund will be required to include in
income each year its pro rata share of the qualified electing fund's annual
ordinary earnings and net capital gain, even if they are not distributed to
the Fund; those amounts would be subject to the distribution requirements
applicable to the Fund described above.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or
eliminate such taxes. It is impossible to determine in advance the effective
rate of foreign tax to which the Fund will be subject, since the amount of the
Fund's assets to be invested in various countries will vary. The Fund does not
expect to meet the requirements of the Internal Revenue Code for "passing
through" to its shareholders any foreign income taxes paid.
Shareholders are advised to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in the Fund.
PERFORMANCE INFORMATION
Average Annual Total Return. The Fund may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares.
Average annual total return is computed according to the following formula:
P(1 + T) n = ERV
<TABLE>
<C> <S>
Where: P = hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).
</TABLE>
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal
or state income taxes that may be payable upon redemption.
Below are the average annual total returns for the Fund's share classes for
the periods ended April 30, 2000.
<TABLE>
<CAPTION>
Since
1 Year 5 Years 10 Years Inception
------ ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Class A..................... (14.80)% 12.47% 13.06% 12.40% (1-22-90)
Class B..................... (15.97) 12.67 12.78 10.96 (1-22-87)
Class C..................... (12.86) 12.57 N/A 12.00 (8-1-94)
Class Z..................... (10.06) N/A N/A 12.71 (3-1-96)
</TABLE>
Aggregate Total Return. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV--P
P
<TABLE>
<C> <S>
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value of a hypothetical $1000 payment made at
the beginning of the 1, 5 or 10 year periods
at the end of the 1, 5 or 10 year periods (or fractional portion
thereof).
</TABLE>
B-43
<PAGE>
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
Below are the aggregate total returns for the Fund's share classes for the
periods ended April 30, 2000.
<TABLE>
<CAPTION>
Six Since
Months 1 Year 5 Years 10 Years Inception
------ ------ ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Class A............. 2.54% (10.31)% 89.47% 259.24% 249.64% (1-22-90)
Class B............. 2.17 (10.97) 82.59 232.78 297.38 (1-22-87)
Class C............. 2.17 (10.97) 82.59 N/A 93.76 (8-1-94)
Class Z............. 2.73 (10.06) N/A N/A 64.57 (3-1-96)
</TABLE>
Advertising. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to
the approximate number of Fund shareholders and may refer to Lipper rankings
or Morningstar ratings, other related analysis supporting those ratings, other
industry publications, business periodicals and market indexes. In addition,
advertising materials may reference studies or analyses performed by the
Manager or its affiliates. Advertising materials for sector funds, funds that
focus on market capitalizations, index funds and international/global funds
may discuss the potential benefits and risks of that investment style.
Advertising materials for fixed-income funds may discuss the benefits and
risks of investing in the bond market including discussions of credit quality,
duration and maturity.
Set forth below is a chart which compares the performance of different types
of investments over the long term and the rate of inflation./1/
Performance Comparison of Different Types of Investments
Over The Long Term (12/31/25 - 12/31/99)
[GRAPH]
Common Stocks 11.4%
Long-Term Gov't. Bonds 5.1%
Inflation 3.1%
/1/Source: Ibbotson Associates. All rights reserved. Common stock returns are
based on the Standard & Poor's 500 Composite Stock Price Index, a market-
weighted, unmanaged index of 500 common stocks in a variety of industry
sectors. It is a commonly used indicator of broad stock price movements. This
chart is for illustrative purposes only, and is not intended to represent the
performance of any particular investment or fund. Investors cannot invest
directly in an index. Past performance is not a guarantee of future results.
B-44
<PAGE>
Portfolio of Investments as
of October 31, 1999 PRUDENTIAL EQUITY INCOME FUND
------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--99.6%
COMMON STOCKS--94.4%
------------------------------------------------------------
Airlines--3.7%
956,300 AMR Corp.(a)(b) $ 60,725,050
224,100 US Airways Group, Inc.(a) 6,274,800
--------------
66,999,850
------------------------------------------------------------
Aluminum--10.1%
1,895,900 Alcoa Inc.(b) 115,175,925
1,076,384 Reynolds Metals Co. 65,053,958
--------------
180,229,883
------------------------------------------------------------
Apparel--0.7%
688,200 Kellwood Co. 12,172,538
------------------------------------------------------------
Automobiles & Trucks--3.9%
445,218 Delphi Automotive Systems Corp. 7,318,271
335,800 Ford Motor Co.(b) 18,427,025
637,000 General Motors Corp. 44,749,250
--------------
70,494,546
------------------------------------------------------------
Building & Construction--1.6%
680,600 Kaufman & Broad Home Corp. 13,654,538
725,100 Ryland Group, Inc. 14,955,187
--------------
28,609,725
------------------------------------------------------------
Chemicals--6.1%
735,700 Dow Chemical Co.(b) 86,996,525
487,200 Lyondell Chemical Co. 5,907,300
848,028 Millennium Chemicals, Inc. 15,688,518
--------------
108,592,343
------------------------------------------------------------
Diversfied Consumer Products--0.8%
217,000 Eastman Kodak Co. 14,959,437
------------------------------------------------------------
Diversified Operations--0.6%
819,700 Tomkins PLC, ADR (United
Kingdom)(b) 11,475,800
Electrical Equipment--0.9%
596,000 Esterline Technologies Corp.(a) $ 8,195,000
360,800 Newport Corp.(b) 7,035,600
--------------
15,230,600
------------------------------------------------------------
Energy Systems--2.8%
2,819,500 McDermott International, Inc. 51,103,437
------------------------------------------------------------
Financial Services--12.8%
997,455 Bear Stearns Cos., Inc. 42,516,520
322,500 Edwards (A.G.), Inc. 9,695,156
1,434,300 Hanvit Bank, GDR (South
Korea)(a) 10,757,250
1,545,900 Lehman Brothers Holdings, Inc. 113,913,506
1,311,300 PaineWebber Group, Inc. 53,435,475
--------------
230,317,907
------------------------------------------------------------
Forest & Paper--3.8%
778,800 Georgia-Pacific Corp.(b) 30,908,625
1,283,400 Louisiana-Pacific Corp. 16,283,138
204,700 Potlatch Corp. 8,635,781
198,000 Weyerhaeuser Co.(b) 11,818,125
--------------
67,645,669
------------------------------------------------------------
Gas Pipelines--0.6%
942,360 TransCanada Pipelines Ltd.(b) 11,367,218
------------------------------------------------------------
Health Care Services--3.4%
1,017,300 Columbia/HCA Healthcare Corp. 24,542,362
1,148,100 Humana Inc.(a) 7,893,188
53,542 LifePoint Hospitals, Inc.(a) 632,465
1,980,000 PhyCor, Inc.(a) 4,950,000
1,125,300 Tenet Healthcare Corp.(a) 21,873,019
53,542 Triad Hospitals, Inc.(a) 522,034
--------------
60,413,068
------------------------------------------------------------
Insurance--2.0%
200,700 Marsh & McLennan Cos., Inc. 15,867,844
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
B-45
<PAGE>
Portfolio of Investments as
of October 31, 1999 PRUDENTIAL EQUITY INCOME FUND
------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Insurance (cont'd.)
779,000 Ohio Casualty Corp.(b) $ 12,999,562
353,200 Selective Insurance Group, Inc. 6,600,425
--------------
35,467,831
------------------------------------------------------------
Machinery--2.4%
14,600 Cascade Corp. 133,225
167,600 Commercial Intertech Corp. 2,126,425
1,100,100 Flowserve Corp. 18,564,187
200,000 Graco, Inc. 6,700,000
150,000 Regal-Beloit Corp. 3,262,500
600,000 United Dominion Industries, Ltd.
(Canada) 12,712,500
--------------
43,498,837
------------------------------------------------------------
Mining
67,658 Ashanti Goldfields Co. Ltd., GDR
(Africa) 321,376
------------------------------------------------------------
Miscellaneous Industrial--4.2%
1,967,200 Hanson PLC, ADR (United Kingdom) 76,106,050
------------------------------------------------------------
Oil & Gas Exploration/Production--6.2%
703,200 Noble Affiliates, Inc. 17,799,750
990,000 Occidental Petroleum Corp. 22,584,375
1,157,400 Pennzoil-Quaker State Co. 13,671,787
2,468,327 Pioneer Natural Resources Co.(b) 23,140,566
481,200 Stillwater Mining Co.(a) 9,684,150
371,377 Total Fina SA, ADR (France) 24,766,199
--------------
111,646,827
------------------------------------------------------------
Paper & Packaging--1.1%
752,300 Gibson Greetings, Inc. 3,667,463
1,332,100 Longview Fibre Co. 15,152,637
--------------
18,820,100
------------------------------------------------------------
Real Estate Investment Trust--12.1%
584,100 Capital Automotive REIT 7,447,275
2,607,800 Crescent Real Estate Equities,
Inc. 43,517,662
1,142,900 Crown American Realty Trust 7,000,263
553,826 Equity Office Properties Trust 12,253,400
1,589,000 Equity Residential Properties
Trust $ 66,440,062
538,500 Gables Residential Trust 13,024,969
525,000 Glimcher Realty Trust 7,776,563
406,200 Manufactured Home Communities,
Inc. 9,469,537
164,900 TriNet Corporate Realty Trust,
Inc. 3,803,006
1,243,300 Vornado Realty Trust 39,397,069
351,400 Walden Residential Properties,
Inc. 7,533,138
--------------
217,662,944
------------------------------------------------------------
Retail--4.8%
801,093 Limited, Inc. (The) 32,944,950
145,900 Dillard's, Inc. 2,753,863
1,726,500 Heilig-Meyers Co. 7,553,437
2,462,520 Nabisco Group Holdings Corp. 31,551,037
481,400 Penney (J.C.) Co., Inc.(b) 12,215,525
--------------
87,018,812
------------------------------------------------------------
Steel--3.5%
938,900 AK Steel Holding Corp. 16,254,706
1,188,000 Bethlehem Steel Corp. 8,241,750
1,497,400 USX Corp.-U.S. Steel Group 38,277,288
--------------
62,773,744
------------------------------------------------------------
Telecommunication Services--1.6%
354,700 Telecomunicacoes Brasileras SA,
ADR (Brazil) 11,084
327,200 Telefonos de Mexico, SA,
ADR (Mexico)(b) 27,975,600
--------------
27,986,684
------------------------------------------------------------
Tobacco--2.3%
925,600 Philip Morris Companies, Inc. 23,313,550
820,840 R.J. Reynolds Tobacco Holdings,
Inc. 17,801,967
--------------
41,115,517
------------------------------------------------------------
Tools--0.6%
354,800 Snap-on Inc. 10,777,050
------------------------------------------------------------
Trucking & Shipping--0.6%
584,600 Yellow Corp.(a) 9,938,200
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
B-46
<PAGE>
Portfolio of Investments as
of October 31, 1999 PRUDENTIAL EQUITY INCOME FUND
------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------
Waste Management--0.3%
311,317 Waste Management, Inc. $ 5,720,450
------------------------------------------------------------
Wood Processing--0.9%
392,700 Rayonier Inc. 16,100,700
Total common stocks
(cost $1,529,759,689) 1,694,567,143
--------------
------------------------------------------------------------
PREFERRED STOCKS--4.6%
------------------------------------------------------------
Manufacturing--0.1%
262,500 Worthington Industries Inc.
Conv. 7.25% 1,640,625
------------------------------------------------------------
Mining--0.1%
34,500 Hecla Mining Co.,
Conv. 7.00%, Ser. B 1,138,500
------------------------------------------------------------
Retail--1.5%
608,500 K-Mart Financing I,
Conv. 7.75% 27,344,469
------------------------------------------------------------
Steel--0.7%
248,300 Bethlehem Steel Corp.,
Conv. $3.50 7,449,000
118,900 USX-Capital Trust I
Conv., 6.75% 4,778,294
--------------
12,227,294
------------------------------------------------------------
Telecommunication Services--1.5%
354,700 Telebras SA, ADR (Brazil)(b) 27,622,262
------------------------------------------------------------
Transportation-Road & Rail--0.7%
241,500 Union Pacific Capital Trust 11,773,125
--------------
Total preferred stocks
(cost $105,418,275) 81,746,275
--------------
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
------------------------------------------------------
<C> <C> <S> <C>
CONVERTIBLE BONDS--0.6%
------------------------------------------------------------
Real Estate Investment Trust--0.2%
B3 $ 3,761 Malan Realty Investors,
Inc.,
Conv. 9.50%, 7/15/04,
Sub. Deb. $ 3,403,705
------------------------------------------------------------
Retail--0.4%
B2 7,921 Charming Shoppes Inc.
Conv. 7.50%, 7/15/06 7,287,320
--------------
Total convertible bonds
(cost $11,819,331) 10,691,025
--------------
Total long-term investments
(cost $1,646,997,295) 1,787,004,443
--------------
------------------------------------------------------------
SHORT-TERM INVESTMENTS--7.0%
------------------------------------------------------------
Commercial Paper--4.1%
Bombardier Capital Inc.
7,000 5.55%, 11/15/99(c) 6,982,733
11,000 5.60%, 11/12/99(c) 10,977,756
11,000 Burlington Resources, Inc.
5.50%, 11/01/99(c) 10,994,958
10,000 Coastal Corp.
5.58%, 11/17/99(c) 9,972,100
17,000 Raytheon Corp.
5.50%, 11/12/99(c) 16,965,219
18,000 Rohm & Hass Co.
5.50%, 11/01/99(c) 17,991,750
--------------
Total commercial paper
(cost $73,884,516) 73,884,516
--------------
------------------------------------------------------------
Loan Participation--0.6%
11,000 Tyson Foods, Inc.
5.47%, 11/01/99(c)
(cost $11,000,000) 11,000,000
------------------------------------------------------------
Time Deposit--1.5%
27,660 First Union National Bank
5.28%, 11/01/99(c)
(cost $27,660,000) 27,660,000
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
B-47
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Portfolio of Investments as of October 31, 1999
------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Repurchase Agreement--0.8%
$14,509 Joint Repurchase Agreement
Account,
5.21%, 11/1/99
(cost $14,509,000; Note 5) $ 14,509,000
--------------
Total short-term investments
(cost $127,053,516) 127,053,516
--------------
------------------------------------------------------------
Total Investments--106.6%
(cost $1,774,050,811; Note 4) 1,914,057,959
Liabilities in excess of other
assets--(6.6%) (118,029,657)
--------------
Net Assets--100% $1,796,028,302
--------------
--------------
</TABLE>
---------------
(a) Non-income producing security.
(b) Portion of securities on loan, see Note 4.
(c) Represents security, or portion thereof, purchased with cash collateral
received for securities on loan.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
PLC--Public Limited Company.
SA--Sociedad Anomia (Spanish Corporation) or Societe Anonyme (French
Corporation). The Fund's current Statement of Additional Information contains a
description of Moody's ratings.
--------------------------------------------------------------------------------
See Notes to Financial Statements.
B-48
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL EQUITY INCOME FUND
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets October 31, 1999
<S> <C>
Investments, at value (cost $1,774,050,811)............................................................... $1,914,057,959
Cash...................................................................................................... 26,811
Dividends and interest receivable......................................................................... 2,563,303
Receivable for Fund shares sold........................................................................... 1,081,423
Receivable for investments sold........................................................................... 939,039
Receivable for securities lending......................................................................... 68,473
Prepaid expenses.......................................................................................... 43,800
----------------
Total assets........................................................................................... 1,918,780,808
----------------
Liabilities
Payable to broker for collateral for securities on loan................................................... 112,051,950
Payable for Fund shares reacquired........................................................................ 5,537,601
Payable for investments purchased......................................................................... 2,877,737
Distribution fee payable.................................................................................. 1,008,480
Management fee payable.................................................................................... 775,016
Securities lending rebate payable......................................................................... 438,533
Accrued expenses.......................................................................................... 36,290
Foreign withholding tax payable........................................................................... 26,899
----------------
Total liabilities...................................................................................... 122,752,506
----------------
Net Assets................................................................................................ $1,796,028,302
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 993,191
Paid-in capital in excess of par....................................................................... 1,446,540,382
----------------
1,447,533,573
Accumulated net realized gains......................................................................... 208,488,456
Net unrealized appreciation on investments and foreign currencies...................................... 140,006,273
----------------
Net assets, October 31, 1999.............................................................................. $1,796,028,302
----------------
----------------
Class A:
Net asset value and redemption price per share
($619,468,527 / 34,191,040 shares of beneficial interest issued and outstanding).................... $18.12
Maximum sales charge (5% of offering price)............................................................ .95
----------------
Maximum offering price to public....................................................................... $19.07
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($1,006,346,032 / 55,733,634 shares of beneficial interest issued and outstanding).................. $18.06
----------------
----------------
Class C:
Net asset value and redemption price per share
($33,684,824 / 1,865,572 shares of beneficial interest issued and outstanding)...................... $18.06
Sales charge (1% of offering price).................................................................... .18
----------------
Offering price to public............................................................................... $18.24
----------------
----------------
Class Z:
Net asset value, offering price and redemption price per share
($136,528,919 / 7,528,822 shares of beneficial interest issued and outstanding)..................... $18.13
----------------
----------------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
B-49
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Operations
--------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income October 31, 1999
<S> <C>
Income
Dividends (net of foreign withholding taxes
of $1,072,938).......................... $ 53,601,878
Interest................................... 1,944,518
Income from securities loaned, net......... 411,204
----------------
Total income............................ 55,957,600
----------------
Expenses
Management fee............................. 10,287,851
Distribution fee--Class A.................. 1,634,495
Distribution fee--Class B.................. 12,006,633
Distribution fee--Class C.................. 369,808
Transfer agent's fees and expenses......... 4,684,000
Reports to shareholders.................... 340,000
Custodian's fees and expenses.............. 181,000
Registration fees.......................... 145,000
Trustees' fees and expenses................ 36,000
Insurance.................................. 35,000
Legal fees and expenses.................... 26,000
Audit fee and expenses..................... 25,000
Miscellaneous.............................. 10,464
----------------
Total expenses.......................... 29,781,251
----------------
Net investment income......................... 26,176,349
----------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currencies
Net realized gain (loss) on:
Investment transactions.................... 218,035,153
Foreign currency transactions.............. (1,529,033)
----------------
216,506,120
----------------
Net change in unrealized appreciation (depreciation) of:
Investments................................ (142,077,401)
Foreign currencies......................... 2,065
----------------
(142,075,336)
----------------
Net gain on investments and foreign
currencies................................. 74,430,784
----------------
Net Increase in Net Assets
Resulting from Operations..................... $ 100,607,133
----------------
----------------
</TABLE>
PRUDENTIAL EQUITY INCOME FUND
Statement of Changes in Net Assets
--------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) -------------------------------
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income........ $ 26,176,349 $ 37,410,326
Net realized gain on
investments and foreign
currency transactions..... 216,506,120 138,053,262
Net change in unrealized
depreciation of
investments and foreign
currencies................ (142,075,336) (224,412,031)
-------------- --------------
Net increase (decrease) in
net assets resulting from
operations................ 100,607,133 (48,948,443)
-------------- --------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A................... (11,212,454) (14,084,914)
Class B................... (11,757,902) (19,144,502)
Class C................... (360,445) (438,559)
Class Z................... (2,845,548) (2,479,859)
-------------- --------------
(26,176,349) (36,147,834)
-------------- --------------
Dividends in excess of net
investment income
Class A................... (1,032,878) --
Class B................... (1,796,239) --
Class C................... (55,705) --
Class Z................... (189,062) --
-------------- --------------
(3,073,884) --
-------------- --------------
Distributions from net realized gains
Class A................... (36,735,180) (54,361,373)
Class B................... (73,406,073) (114,880,805)
Class C................... (2,177,750) (1,798,135)
Class Z................... (7,944,744) (8,584,415)
-------------- --------------
(120,263,747) (179,624,728)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold.... 495,723,387 1,012,745,142
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 138,241,458 198,544,772
Cost of shares reacquired.... (908,444,366) (740,383,287)
-------------- --------------
Net increase (decrease) in
net assets from Fund share
transactions.............. (274,479,521) 470,906,627
-------------- --------------
Total increase (decrease)....... (323,386,368) 206,185,622
Net Assets
Beginning of year............... 2,119,414,670 1,913,229,048
-------------- --------------
End of year(a).................. $1,796,028,302 $2,119,414,670
-------------- --------------
-------------- --------------
(a)Includes undistributed net
investment income of......... $ -- $ 500,009
-------------- --------------
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
B-50
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
--------------------------------------------------------------------------------
Prudential Equity Income Fund (the 'Fund') is registered under the Investment
Company Act of 1940 as a diversified, open-end, management investment company.
The investment objective of the Fund is both current income and capital
appreciation. It seeks to achieve this objective by investing primarily in
common stocks and convertible securities that provide investment income returns
above those of the Standard & Poor's 500 Composite Stock Price Index or the NYSE
Composite Index. The ability of the issuers of the debt securities held by the
Fund to meet their obligations may be affected by economic developments in a
specific industry or country.
------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments in securities traded on a national securities
exchange (or reported on the Nasdaq national market) are valued at the last sale
price on such exchange on the day of valuation or, if there was no sale on such
day, the mean between the last bid and asked prices quoted on such day or at the
bid price in the absence of an asked price. Securities that are actively traded
in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued by an independent
pricing agent or principal market maker. Securities for which reliable market
quotations are not available or for which the pricing agent or principal market
maker does not provide a valuation or methodology or provides a valuation or
methodology that does not represent fair value, are valued in accordance with
procedures adopted by the Fund's Board of Trustees.
Short-term securities which mature in more than 60 days are valued based upon
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults and the value of
the collateral declines or if bankruptcy proceedings are commenced with respect
to the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
current rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term debt securities sold
during the period. Accordingly, such realized foreign currency gains and losses
are included in the reported net realized gains/losses on investment
transactions.
Net realized losses on foreign currency transactions of $1,529,033 represents
net foreign exchange gains and losses from sales and maturities of short-term
securities and forward currency contracts, holding of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between the amounts of interest and
foreign taxes recorded on the Fund's books and the U.S. dollar equivalent
amounts actually received or paid. Net currency gains and losses from valuing
foreign currency denominated assets (excluding investments) and liabilities at
period end exchange rates are reflected as a component of net unrealized
appreciation/depreciation on investments and foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of U.S. companies as a result of,
among other factors, the possibility of political or economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date, interest income is recorded on the accrual basis. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of the Fund based
upon the relative proportion of net assets of each class at the beginning of the
day.
--------------------------------------------------------------------------------
B-51
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
--------------------------------------------------------------------------------
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rates.
Dividends and Distributions: The Fund expects to pay dividends out of net
investment income quarterly and make distributions at least annually of any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatment of
distributions from Real Estate Investment Trusts.
Securities Lending: The Fund may lend securities to broker-dealers. The loans
are secured by collateral at least equal at all times to the market value of the
securities loaned. Loans are subject to termination at the option of the
borrower or the Fund. Upon termination of the loan, the borrower will return to
the lender securities identical to the loaned securities. The Fund may bear the
risk of delay in recovery of, or even loss of rights in, the securities loaned
should the borrower of the securities fail financially. The Fund receives
compensation, net of any rebate, for lending its securities in the form of fees
or it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan. Prudential Securities
Incorporated ('PSI') is the securities lending agent for the Fund. For the year
ended October 31, 1999, PSI has been compensated approximately $115,300 for
these services.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease accumulated net realized gains on investments by
$22,418,100, increase undistributed net investment loss by $2,573,875 and
increase paid-in capital by $19,844,225 for realized foreign currency losses and
for redemptions utilized as distibutions for federal income tax purposes. Net
investment income, net realized gains and net assets were not affected by these
changes.
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. Pursuant to a subadvisory agreement between PIFM and The Prudential
Investment Corporation ('PIC'), PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .60 of 1% of the Fund's average daily net assets up to $500 million, .50
of 1% of the next $500 million, .475 of 1% of the next $500 million and .45 of
1% of the average daily net assets in excess of $1.5 billion.
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'), which acts as the distributor of the Class A, Class B,
Class C and Class Z shares. The Fund compensates PIMS for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares for the year ended October 31, 1999,
respectively.
PIMS has advised the Fund that it has received approximately $376,500 and
$54,600 in front-end sales charges resulting from sales of Class A shares and
Class C shares, respectively, during the year ended October 31, 1999. From these
fees, PIMS paid such sales charges to affiliated broker-dealers, which in turn
paid commissions to salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended October 31, 1999, it received
approximately $2,448,000 and $30,100 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential Insurance
Company of America ('Prudential').
--------------------------------------------------------------------------------
B-52
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
--------------------------------------------------------------------------------
As of March 11, 1999, the Fund along with other affiliated registered investment
companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with
an unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any borrowings will be at market rates. The Funds pay a commitment
fee at an annual rate of .065 of 1% on the unused portion of the credit
facility, which is accrued and paid quarterly on a pro rata basis by the Funds.
The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had a
credit agreement with a maximum commitment of $200,000,000. The commitment fee
was .055 of 1% on the unused portion of the credit facility. The Fund did not
borrow any amounts pursuant to either agreement during the year ended October
31, 1999. The purpose of the agreements is to serve as an alternative source of
funding for capital share redemptions.
------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended October 31, 1999, the
Fund incurred fees of approximately $4,328,000 for the services of PMFS. As of
October 31, 1999, approximately $357,800 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
For the year ended October 31, 1999, PSI, which is an indirect, wholly owned
subsidiary of Prudential, earned approximately $81,300 in brokerage commissions
from portfolio transactions executed on behalf of the Fund.
------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended October 31, 1999 were $340,763,609 and $710,716,241,
respectively.
The cost basis of investments for federal income tax purposes at October 31,
1999 was $1,662,502,374 and, accordingly, net unrealized appreciation for
federal income tax purposes was $139,011,069 (gross unrealized
appreciation--$421,699,859; gross unrealized depreciation--$282,688,790).
As of October 31, 1999, the Fund had securities on loan with an aggregate market
value of $108,364,179. The Fund received $112,051,950 in cash as collateral for
securities on loan which was used to purchase highly liquid short-term
investments in accordance with the Fund's securities lending procedures.
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or Federal agency obligations. As of October 31, 1999, the Fund
had a 1.5% undivided interest in repurchase agreements in the joint account. The
undivided interest for the Fund represented $14,509,000 in principal amount. As
of such date, each repurchase agreement in the joint account and the value of
the collateral therefor were as follows:
Bear, Stearns & Co. Inc., 5.23%, in the principal amount of $250,000,000,
repurchase price $250,108,958, due 11/1/99. The value of the collateral
including accrued interest was $255,352,721.
Goldman, Sachs & Co., 5.18%, in the principal amount of $194,830,000, repurchase
price $194,914,102, due 11/1/99. The value of the collateral including accrued
interest was $198,727,175.
Morgan (J.P.) Securities, Inc., 5.22%, in the principal amount of $250,000,000,
repurchase price $250,108,750, due 11/1/99. The value of the collateral
including accrued interest was $255,000,115.
Salomon Smith Barney Inc., 5.22%, in the principal amount of $250,000,000,
repurchase price $250,108,750, due 11/1/99. The value of the collateral
including accrued interest was $255,452,608.
------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Prior to November 2, 1998, Class C shares
were sold with a contingent deferred sales charge of 1% during the first year.
Effective November 2, 1998, Class C shares are sold with a front-end sales
charge of 1% and a contingent deferred sales charge of 1% during the first 18
months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value or Class Z shares. Class Z shares are not subject to
any sales or redemption charge and are offered exclusively for sale to a limited
group of investors.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.01 par value divided into four classes, designated Class A, Class B, Class C
and Class Z.
--------------------------------------------------------------------------------
B-53
<PAGE>
Notes to Financial Statements PRUDENTIAL EQUITY INCOME FUND
--------------------------------------------------------------------------------
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
--------------------------------- ----------- -------------
<S> <C> <C>
Year ended October 31, 1999:
Shares sold...................... 16,694,821 $ 317,280,599
Shares issued in reinvestment of
dividends and distributions.... 2,467,403 44,364,034
Shares reacquired................ (22,063,847) (415,812,468)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (2,901,623) (54,167,835)
Shares issued upon conversion
from Class B................... 2,822,586 53,289,360
----------- -------------
Net decrease in shares
outstanding.................... (79,037) $ (878,475)
----------- -------------
----------- -------------
Year ended October 31, 1998:
Shares sold...................... 18,187,422 $ 372,808,932
Shares issued in reinvestment of
dividends and distributions.... 3,225,575 63,494,283
Shares reacquired................ (16,281,521) (328,591,719)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 5,131,476 107,711,496
Shares issued upon conversion
and/or exchanged from Class
B.............................. 1,987,257 39,239,381
----------- -------------
Net increase in shares
outstanding.................... 7,118,733 $ 146,950,877
----------- -------------
----------- -------------
<CAPTION>
Class B
---------------------------------
<S> <C> <C>
Year ended October 31, 1999:
Shares sold...................... 5,716,752 $ 108,733,754
Shares issued in reinvestment of
dividends and distributions.... 4,509,403 80,447,105
Shares reacquired................ (21,658,431) (404,250,026)
----------- -------------
Net decrease in shares
outstanding before
conversion..................... (11,432,276) (215,069,167)
Shares reacquired upon conversion
into Class A................... (2,833,175) (53,289,360)
----------- -------------
Net decrease in shares
outstanding.................... (14,265,451) $(268,358,527)
----------- -------------
----------- -------------
Year ended October 31, 1998:
Shares sold...................... 21,354,121 $ 438,253,055
Shares issued in reinvestment of
dividends and distributions.... 6,214,814 121,857,308
Shares reacquired................ (15,295,489) (302,422,093)
----------- -------------
Net increase in shares
outstanding before
conversion..................... 12,273,446 257,688,270
Shares reacquired upon conversion
into Class A................... (1,995,029) (39,239,381)
----------- -------------
Net increase in shares
outstanding.................... 10,278,417 $ 218,448,889
----------- -------------
----------- -------------
<CAPTION>
Class C Shares Amount
--------------------------------- ----------- -------------
<S> <C> <C>
Year ended October 31, 1999:
Shares sold...................... 736,586 $ 14,065,037
Shares issued in reinvestment of
dividends and distributions.... 139,408 2,487,645
Shares reacquired................ (1,055,951) (19,790,850)
----------- -------------
Net decrease in shares
outstanding.................... (179,957) $ (3,238,168)
----------- -------------
----------- -------------
Year ended October 31, 1998:
Shares sold...................... 1,490,743 $ 30,682,873
Shares issued in reinvestment of
dividends and distributions.... 109,439 2,144,607
Shares reacquired................ (410,298) (8,131,504)
----------- -------------
Net increase in shares
outstanding.................... 1,189,884 $ 24,695,976
----------- -------------
----------- -------------
<CAPTION>
Class Z
---------------------------------
<S> <C> <C>
Year ended October 31, 1999:
Shares sold...................... 2,860,602 $ 55,643,997
Shares issued in reinvestment of
dividends and distributions.... 607,453 10,942,674
Shares reacquired................ (3,605,044) (68,591,022)
----------- -------------
Net decrease in shares
outstanding.................... (136,989) $ (2,004,351)
----------- -------------
----------- -------------
Year ended October 31, 1998:
Shares sold...................... 8,469,492 $ 171,000,282
Shares issued in reinvestment of
dividends and distributions.... 563,480 11,048,574
Shares reacquired................ (4,936,214) (101,237,971)
----------- -------------
Net increase in shares
outstanding.................... 4,096,758 $ 80,810,885
----------- -------------
----------- -------------
</TABLE>
------------------------------------------------------------
Note 7. Dividends
On December 1, 1999 the Board of Trustees of the Fund declared the following
dividends per share, payable on December 3, 1999 to shareholders of record on
December 2, 1999.
<TABLE>
<CAPTION>
Class Class B Class
A and C Z
--------- --------- -------
<S> <C> <C> <C>
Ordinary Income.................. $ 0.09 $ 0.055 $0.1025
Short-Term Capital Gains......... 0.025 0.025 0.025
Long-Term Capital Gains.......... 2.15 2.15 2.15
</TABLE>
--------------------------------------------------------------------------------
B-54
<PAGE>
Financial Highlights PRUDENTIAL EQUITY INCOME FUND
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended October 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 18.63 $ 21.00 $ 15.43 $ 14.40 $ 14.03
-------- -------- -------- -------- --------
Income from investment operations
Net investment income..................................... .33 .45 .45 .47 .48
Net realized and unrealized gain (loss) on investment
transactions........................................... .58 (.49) 6.29 1.75 .95
-------- -------- -------- -------- --------
Total from investment operations....................... .91 (.04) 6.74 2.22 1.43
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income...................... (.33) (.44) (.43) (.49) (.54)
Dividends in excess of net investment income.............. (.03) -- -- -- --
Distributions from net realized gains..................... (1.06) (1.89) (.74) (.70) (.52)
-------- -------- -------- -------- --------
Total distributions.................................... (1.42) (2.33) (1.17) (1.19) (1.06)
-------- -------- -------- -------- --------
Net asset value, end of year.............................. $ 18.12 $ 18.63 $ 21.00 $ 15.43 $ 14.40
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):.......................................... 5.03% (.65)% 45.68% 15.97% 11.15%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $619,469 $638,547 $570,146 $341,717 $276,990
Average net assets (000).................................. $653,798 $655,776 $454,892 $310,335 $236,688
Ratios to average net assets:
Expenses, including distribution fees.................. 1.02% .91% .94% .98% 1.03%
Expenses, excluding distribution fees.................. .77% .66% .69% .73% .78%
Net investment income.................................. 1.71% 2.19% 2.32% 3.26% 3.36%
For Class A, B, C and Z shares:
Portfolio turnover rate................................... 17% 22% 36% 36% 74%
</TABLE>
---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
--------------------------------------------------------------------------------
See Notes to Financial Statements.
B-55
<PAGE>
Financial Highlights PRUDENTIAL EQUITY INCOME FUND
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------------
Year Ended October 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 18.57 $ 20.93 $ 15.39 $ 14.36 $ 14.00
---------- ---------- ---------- ---------- --------
Income from investment operations
Net investment income..................................... .19 .29 .29 .39 .37
Net realized and unrealized gain (loss) on investment
transactions........................................... .58 (.48) 6.29 1.71 .95
---------- ---------- ---------- ---------- --------
Total from investment operations....................... .77 (.19) 6.58 2.10 1.32
---------- ---------- ---------- ---------- --------
Less distributions
Dividends from net investment income...................... (.19) (.28) (.30) (.37) (.44)
Dividends in excess of net investment income.............. (.03) -- -- -- --
Distributions from net realized gains..................... (1.06) (1.89) (.74) (.70) (.52)
---------- ---------- ---------- ---------- --------
Total distributions.................................... (1.28) (2.17) (1.04) (1.07) (.96)
---------- ---------- ---------- ---------- --------
Net asset value, end of year.............................. $ 18.06 $ 18.57 $ 20.93 $ 15.39 $ 14.36
---------- ---------- ---------- ---------- --------
---------- ---------- ---------- ---------- --------
TOTAL RETURN(a):.......................................... 4.25% (1.35)% 44.60% 15.12% 10.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $1,006,346 $1,299,962 $1,250,216 $ 929,948 $906,793
Average net assets (000).................................. $1,200,663 $1,391,826 $1,072,118 $ 951,220 $911,856
Ratios to average net assets:
Expenses, including distribution fees.................. 1.77% 1.66% 1.69% 1.73% 1.78%
Expenses, excluding distribution fees.................. .77% .66% .69% .73% .78%
Net investment income.................................. .98% 1.44% 1.60% 2.51% 2.66%
</TABLE>
---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
--------------------------------------------------------------------------------
See Notes to Financial Statements.
B-56
<PAGE>
Financial Highlights PRUDENTIAL EQUITY INCOME FUND
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-----------------------------------------------------
Year Ended October 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................ $ 18.57 $ 20.93 $ 15.39 $14.36 $14.00
------- ------- ------- ------ ------
Income from investment operations
Net investment income..................................... .19 .30 .37 .38 .40
Net realized and unrealized gain (loss) on investment
transactions........................................... .58 (.49) 6.21 1.72 .92
------- ------- ------- ------ ------
Total from investment operations....................... .77 (.19) 6.58 2.10 1.32
------- ------- ------- ------ ------
Less distributions
Dividends from net investment income...................... (.19) (.28) (.30) (.37) (.44)
Dividends in excess of net investment income.............. (.03) -- -- -- --
Distributions from net realized gains..................... (1.06) (1.89) (.74) (.70) (.52)
------- ------- ------- ------ ------
Total distributions.................................... (1.28) (2.17) (1.04) (1.07) (.96)
------- ------- ------- ------ ------
Net asset value, end of year.............................. $ 18.06 $ 18.57 $ 20.93 $15.39 $14.36
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(a):.......................................... 4.25% (1.35)% 44.60% 15.12% 10.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $33,685 $37,988 $17,911 $8,511 $4,586
Average net assets (000).................................. $36,981 $31,345 $11,432 $6,730 $3,132
Ratios to average net assets:
Expenses, including distribution fees.................. 1.77% 1.66% 1.69% 1.73% 1.78%
Expenses, excluding distribution fees.................. .77% .66% .69% .73% .78%
Net investment income.................................. .98% 1.47% 1.53% 2.51% 2.57%
</TABLE>
---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
--------------------------------------------------------------------------------
See Notes to Financial Statements.
B-57
<PAGE>
Financial Highlights PRUDENTIAL EQUITY INCOME FUND
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z
-------------------------------------------------
March 1,
1996(c)
Year Ended October 31, Through
--------------------------------- October 31,
1999 1998 1997 1996
-------- -------- ------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 18.64 $ 21.00 $ 15.42 $ 15.13
-------- -------- ------- -----------
Income from investment operations
Net investment income..................................... .38 .52 .36 .38
Net realized and unrealized gain (loss) on investment
transactions........................................... .58 (.51) 6.43 .30
-------- -------- ------- -----------
Total from investment operations....................... .96 .01 6.79 .68
-------- -------- ------- -----------
Less distributions
Dividends from net investment income...................... (.38) (.48) (.47) (.39)
Dividends in excess of net investment income.............. (.03) -- -- --
Distributions from net realized gains..................... (1.06) (1.89) (.74) --
-------- -------- ------- -----------
Total distributions.................................... (1.47) (2.37) (1.21) (.39)
-------- -------- ------- -----------
Net asset value, end of period............................ $ 18.13 $ 18.64 $ 21.00 $ 15.42
-------- -------- ------- -----------
-------- -------- ------- -----------
TOTAL RETURN(a):.......................................... 5.28% (.40)% 46.12% 4.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................... $136,529 $142,918 $74,956 $44,509
Average net assets (000).................................. $144,747 $103,474 $57,369 $24,641
Ratios to average net assets:
Expenses, including distribution fees.................. .77% .66% .69% .73%(b)
Expenses, excluding distribution fees.................. .77% .66% .69% .73%(b)
Net investment income.................................. 1.97% 2.49% 2.58% 3.51%(b)
</TABLE>
---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
(c) Commencement of offering of Class Z shares.
--------------------------------------------------------------------------------
See Notes to Financial Statements.
B-58
<PAGE>
Report of Independent Accountants PRUDENTIAL EQUITY INCOME FUND
--------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Equity Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Equity Income Fund (the
'Fund') at October 31, 1999, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the three years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1999 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above. The accompanying financial highlights for
each of the two periods in the period ended October 31, 1996 were audited by
other independent accountants, whose opinion dated December 5, 1996 was
unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
December 28, 1999
--------------------------------------------------------------------------------
B-59
<PAGE>
Prudential Equity Income Fund
Portfolio of Investments as of April 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C> <C>
------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 99.4%
Common Stocks 95.7%
-------------------------------------------------------------------------------------
Airlines 1.6%
689,400 AMR Corp.(a) $ 23,482,687
-------------------------------------------------------------------------------------
Aluminum 3.9%
172,200 Alcoa Inc.(b) 11,171,475
683,584 Reynolds Metals Co. 45,458,336
----------------
56,629,811
-------------------------------------------------------------------------------------
Apparel 0.8%
659,400 Kellwood Co. 11,292,225
-------------------------------------------------------------------------------------
Automobiles & Trucks 3.2%
97,800 Borg-Warner Automotive, Inc. 4,089,263
206,800 Dana Corp. 6,281,550
272,400 Ford Motor Co. 14,896,875
223,100 General Motors Corp. 20,887,737
----------------
46,155,425
-------------------------------------------------------------------------------------
Building & Construction 3.1%
554,500 Centex Corp. 13,377,313
888,600 Kaufman & Broad Home Corp. 17,105,550
694,900 Ryland Group, Inc. 13,984,862
----------------
44,467,725
-------------------------------------------------------------------------------------
Business Services 1.4%
582,710 Sabre Group Holdings, Inc. 20,358,431
-------------------------------------------------------------------------------------
Chemicals 3.0%
167,100 Dow Chemical Co.(b) 18,882,300
466,900 Lyondell Chemical Co.(b) 8,579,288
812,728 Millennium Chemicals, Inc. 16,203,764
----------------
43,665,352
-------------------------------------------------------------------------------------
Containers & Packaging 0.7%
670,400 Crown Cork & Seal Co., Inc. 10,894,000
</TABLE>
See Notes to Financial Statements
B-60
<PAGE>
Prudential Equity Income Fund
Portfolio of Investments as of April 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Diversfied Consumer Products 3.4%
610,900 Eastman Kodak Co. $ 34,172,219
705,400 R.R. Donnelley & Sons, Co. 14,989,750
----------------
49,161,969
-------------------------------------------------------------------------------------
Diversified Operations 0.7%
785,500 Tomkins PLC, ADR (United Kingdom)(b) 9,573,281
-------------------------------------------------------------------------------------
Electrical Equipment 0.6%
691,900 Esterline Technologies Corp.(a) 8,475,775
-------------------------------------------------------------------------------------
Energy Systems 1.5%
2,706,500 McDermott International, Inc. 21,990,313
-------------------------------------------------------------------------------------
Financial Services 18.9%
759,600 Associates First Capital Corp. 16,853,625
847,727 Bear Stearns Cos., Inc. 36,346,295
360,800 Comerica, Inc. 15,288,900
326,200 Countrywide Credit Industries, Inc. 9,011,275
599,000 Edwards (A.G.), Inc. 22,537,375
1,434,300 Hanvit Bank, GDR (South Korea)(a)(b) 4,159,470
1,178,100 Lehman Brothers Holdings, Inc. 96,677,831
1,031,200 PaineWebber Group, Inc. 45,243,900
302,200 PNC Bank Corp. 13,183,475
651,600 Washington Mutual, Inc. 16,656,525
----------------
275,958,671
-------------------------------------------------------------------------------------
Forest & Paper 2.7%
706,900 Georgia-Pacific Corp.(b) 25,978,575
1,045,500 Louisiana-Pacific Corp. 13,983,562
----------------
39,962,137
-------------------------------------------------------------------------------------
Funeral Services 0.4%
1,039,000 Service Corp. International 5,324,875
-------------------------------------------------------------------------------------
Health Care Services 6.9%
265,700 Aetna, Inc. 15,377,387
1,218,500 Columbia/HCA Healthcare Corp. 34,651,094
</TABLE>
See Notes to Financial Statements
B-61
<PAGE>
Prudential Equity Income Fund
Portfolio of Investments as of April 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C> <C>
2,521,100 Humana, Inc.(a) $ 19,380,956
90 Lifepoint Hospitals, Inc.(a) 1,541
1,201,000 Tenet Healthcare Corp.(a) 30,625,500
----------------
100,036,478
-------------------------------------------------------------------------------------
Insurance 3.1%
495,700 Allstate Corp. 11,710,913
746,600 Ohio Casualty Corp. 12,412,225
665,000 SAFECO Corp. 14,713,125
338,400 Selective Insurance Group, Inc. 6,408,450
----------------
45,244,713
-------------------------------------------------------------------------------------
Machinery 1.4%
244,100 Cascade Corp. 2,517,281
157,200 Graco, Inc. 5,325,150
143,800 Regal-Beloit Corp. 2,597,388
580,100 United Dominion Industries, Ltd. (Canada) 10,115,494
----------------
20,555,313
-------------------------------------------------------------------------------------
Machinery & Equipment 0.5%
163,000 Ingersoll-Rand Co. 7,650,813
-------------------------------------------------------------------------------------
Metals 0.7%
376,600 Stillwater Mining Co.(a) 10,544,800
-------------------------------------------------------------------------------------
Miscellaneous Industrial 4.0%
1,608,700 Hanson PLC, ADR (United Kingdom) 58,818,094
-------------------------------------------------------------------------------------
Oil & Gas Exploration/Production 5.6%
199,700 Anadarko Petroleum Corp. 8,674,469
677,500 Noble Affiliates, Inc. 24,432,344
948,700 Occidental Petroleum Corp. 20,337,756
2,365,527 Pioneer Natural Resources Co. 24,394,497
192,200 USX - Marathon Group 4,480,662
----------------
82,319,728
</TABLE>
See Notes to Financial Statements
B-62
<PAGE>
Prudential Equity Income Fund
Portfolio of Investments as of April 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Packaged Foods 3.2%
2,359,920 Nabisco Group Holding Corp. $ 30,383,970
1,276,600 Longview Fibre Co. 16,276,650
----------------
46,660,620
-------------------------------------------------------------------------------------
Real Estate Investment Trust 12.8%
2,629,800 Crescent Real Estate Equities, Inc. 45,035,325
1,095,300 Crown American Realty Trust 6,092,606
530,726 Equity Office Properties Trust 14,429,113
1,300,800 Equity Residential Properties Trust 59,186,400
343,400 Gables Residential Trust 8,241,600
503,100 Glimcher Realty Trust 6,917,625
286,900 Manufactured Home Communities, Inc. 7,172,500
1,133,900 Vornado Realty Trust 39,119,550
----------------
186,194,719
-------------------------------------------------------------------------------------
Retail 0.3%
1,654,500 Heilig-Meyers Co. 5,066,906
-------------------------------------------------------------------------------------
Steel 3.9%
645,100 AK Steel Holding Corp. 7,136,419
1,138,500 Bethlehem Steel Corp. 6,119,437
251,500 Rouge Industries, Inc. 1,430,406
1,661,100 USX Corp.-U.S. Steel Group 41,631,319
----------------
56,317,581
-------------------------------------------------------------------------------------
Tobacco 2.4%
887,000 Philip Morris Companies, Inc. 19,403,125
786,640 R.J. Reynolds Tobacco Holdings, Inc. 16,322,780
----------------
35,725,905
-------------------------------------------------------------------------------------
Tools 1.1%
591,700 Snap-On, Inc. 15,643,069
-------------------------------------------------------------------------------------
Trucking & Shipping 0.7%
560,300 Yellow Corp.(a) 10,680,719
-------------------------------------------------------------------------------------
Utilities 2.1%
785,900 Nisource, Inc. 14,539,150
</TABLE>
See Notes to Financial Statements
B-63
<PAGE>
Prudential Equity Income Fund
Portfolio of Investments as of April 30, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
------------------------------------------------------------------------------------------
<C> <S> <C> <C>
382,800 PECO Energy Co. $ 15,957,975
----------------
30,497,125
-------------------------------------------------------------------------------------
Wood Processing 1.1%
356,300 Rayonier, Inc. 16,723,831
----------------
Total common stocks (cost $1,329,993,526) 1,396,073,091
----------------
-------------------------------------------------------------------------------------
PREFERRED STOCKS 3.0%
-------------------------------------------------------------------------------------
Mining
33,100 Hecla Mining Co., Conv. 7.00%, Ser. B 769,575
-------------------------------------------------------------------------------------
Retail 1.6%
585,500 K-Mart Financing I, Trust, Conv. 7.75% 23,420,000
-------------------------------------------------------------------------------------
Steel 0.7%
242,400 Bethlehem Steel Corp., Conv. $3.50 5,575,200
114,400 USX-Capital Trust I, Conv., 6.75% 4,247,100
----------------
9,822,300
-------------------------------------------------------------------------------------
Transportation-Road & Rail 0.7%
232,400 Union Pacific Capital Trust 9,877,000
----------------
Total preferred stocks (cost $66,020,952) 43,888,875
----------------
</TABLE>
<TABLE>
<CAPTION>
CONVERTIBLE BONDS 0.7%
Principal
Moody's Amount
Rating (000) Description
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate Investment Trust 0.2%
Malan Realty Investors, Inc.,
B3 $ 3,650 Conv. 9.50%, 7/15/04, Sub. Deb. 3,216,563
-------------------------------------------------------------------------------------
Retail 0.5%
Charming Shoppes Inc.
B2 7,655 7.50%, 7/15/06 7,731,550
---------------
Total convertible bonds
(cost $11,418,724) 10,948,113
---------------
Total long-term investments
(cost $1,407,433,202) 1,450,910,079
---------------
</TABLE>
See Notes to Financial Statements
B-64
<PAGE>
Prudential Equity Income Fund
Portfolio of Investments as of April 30, 2000 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C> <C>
------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 3.2%
-------------------------------------------------------------------------------------
Commercial Paper 3.0%
Bombardier Capital, Inc.
$ 5,000 7.00%, 5/1/00(c) $ 4,997,083
GPU Capital, Inc.
1,000 6.25%, 5/15/00(c) 996,885
12,000 6.22%, 5/10/00(c) 11,976,856
Sprint Capital Corp.
14,000 6.25%, 5/10/00(c) 13,972,926
TRW, Inc.
12,000 6.24%, 5/19/00(c) 11,958,063
----------------
Total commercial paper (cost $43,901,813) 43,901,813
----------------
-------------------------------------------------------------------------------------
Time Deposit 0.1%
1,238 State Street Bank(c)
5.875%, 5/1/00 (cost $1,238,000) 1,238,000
-------------------------------------------------------------------------------------
Repurchase Agreement 0.1%
Joint Repurchase Agreement Account,
5.71%, 5/1/00
(cost $1,335,000; Note 5) 1,335,000
1,335
----------------
Total Investments 102.6%
(cost $1,453,908,015; Note 4) 1,497,384,892
Liabilities in excess of other assets (2.6%) (38,392,363)
----------------
Net Assets 100% $ 1,458,992,529
----------------
----------------
</TABLE>
--------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Portion of securities on loan, see Note 4.
(c) Represents security, or portion thereof, purchased with cash collateral
received for securities on loan.
ADR--American Depository Receipt.
GDR--Global Depository Receipt.
PLC--Public Limited Company.
The Fund's current Statement of Additional Information contains a description of
Moody's ratings.
See Notes to Financial Statements
B-65
<PAGE>
Prudential Equity Income Fund
Statement of Assets and Liabilities (Unaudited)
<TABLE>
<CAPTION>
April 30, 2000
<S> <C> <C>
--------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $1,453,908,015) $1,497,384,892
Cash 475,527
Receivable for investments sold 7,277,645
Dividends and interest receivable 4,347,082
Receivable for securities lending 1,454,743
Receivable for Fund shares sold 699,581
Prepaid expenses 27,007
--------------
Total assets 1,511,666,477
--------------
LIABILITIES
Payable to broker for collateral for securities on loan 44,874,500
Payable for Fund shares reacquired 4,344,849
Accrued expenses 1,604,586
Distribution fee payable 762,375
Management fee payable 637,222
Securities lending rebate payable 247,168
Foreign withholding tax payable 203,248
--------------
Total liabilities 52,673,948
--------------
NET ASSETS $1,458,992,529
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 901,696
Paid-in capital in excess of par 1,301,397,863
--------------
1,302,299,559
Undistributed net investment income 2,164,778
Accumulated net realized gains 111,051,315
Net unrealized appreciation on investments 43,476,877
--------------
Net assets, April 30, 2000 $1,458,992,529
--------------
--------------
</TABLE>
See Notes to Financial Statements
B-66
<PAGE>
Prudential Equity Income Fund
Statement of Assets and Liabilities (Unaudited) Cont'd.
<TABLE>
<CAPTION>
April 30, 2000
<S> <C> <C>
--------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($535,090,404 / 33,003,000 shares of beneficial interest
issued and outstanding) $16.21
Maximum sales charge (5% of offering price) .85
--------------
Maximum offering price to public $17.06
--------------
--------------
Class B:
Net asset value, offering price and redemption price per
share ($756,586,394 / 46,849,611 shares of beneficial
interest issued and outstanding) $16.15
--------------
--------------
Class C:
Net asset value and redemption price per share
($25,969,136 / 1,608,147 shares of beneficial interest
issued and outstanding) $16.15
Sales charge (1% of offering price) .16
--------------
Offering price to public $16.31
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per
share ($141,346,595 / 8,708,843 shares of beneficial
interest issued and outstanding) $16.23
--------------
--------------
</TABLE>
See Notes to Financial Statements
B-67
<PAGE>
Prudential Equity Income Fund
Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
April 30, 2000
<S> <C>
----------------------------------------------------------------------------------
NET INVESTMENT INCOME
Dividends (net of foreign withholding taxes of $280,250) $ 25,665,088
Interest 694,982
Income from securities loaned, net 216,919
--------------
Total income 26,576,989
--------------
Expenses
Management fee 4,145,839
Distribution fee--Class A 709,088
Distribution fee--Class B 4,308,353
Distribution fee--Class C 145,845
Transfer agent's fees and expenses 2,473,000
Reports to shareholders 219,000
Custodian's fees and expenses 92,000
Registration fees 65,000
Trustees' fees and expenses 18,000
Legal fees and expenses 17,000
Insurance 17,000
Audit fee and expenses 12,000
Miscellaneous 13,298
--------------
Total expenses 12,235,423
--------------
Net investment income 14,341,566
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN
CURRENCIES
Net realized gain (loss) on:
Investment transactions 112,921,496
--------------
Net change in unrealized appreciation (depreciation) of:
Investments (96,530,270)
Foreign currencies 875
--------------
(96,529,395)
--------------
Net gain on investments and foreign currencies 16,392,101
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 30,733,667
--------------
--------------
</TABLE>
See Notes to Financial Statements
B-68
<PAGE>
This page intentionally left blank
<PAGE>
Prudential Equity Income Fund
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
April 30, 2000 October 31, 1999
<S> <C> <C> <C>
-----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 14,341,566 $ 26,176,349
Net realized gain on investments and
foreign currency transactions 112,921,496 216,506,120
Net change in unrealized depreciation of
investments and foreign currencies (96,529,395) (142,075,336)
-------------- ----------------
Net increase in net assets resulting from
operations 30,733,667 100,607,133
-------------- ----------------
Dividends and distributions (Note 1)
Dividends from net investment income
Class A (5,379,068) (11,212,454)
Class B (5,136,142) (11,757,902)
Class C (173,166) (360,445)
Class Z (1,488,412) (2,845,548)
-------------- ----------------
(12,176,788) (26,176,349)
-------------- ----------------
Dividends in excess of net investment
income
Class A -- (1,032,878)
Class B -- (1,796,239)
Class C -- (55,705)
Class Z -- (189,062)
-------------- ----------------
-- (3,073,884)
-------------- ----------------
Distributions from net realized gains
Class A (72,440,679) (36,735,180)
Class B (117,327,735) (73,406,073)
Class C (3,915,411) (2,177,750)
Class Z (16,674,813) (7,944,744)
-------------- ----------------
(210,358,638) (120,263,747)
-------------- ----------------
</TABLE>
See Notes to Financial Statements
B-69
<PAGE>
Prudential Equity Income Fund
Statement of Changes in Net Assets (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
April 30, 2000 October 31, 1999
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Fund share transactions (net of share
conversions)
(Note 6)
Proceeds from shares sold $ 217,611,296 $ 495,723,387
Net asset value of shares issued in
reinvestment of dividends and
distributions 207,678,075 138,241,458
Cost of shares reacquired (570,523,385) (908,444,366)
-------------- ----------------
Net decrease in net assets from Fund share
transactions (145,234,014) (274,479,521)
-------------- ----------------
Total decrease (337,035,773) (323,386,368)
NET ASSETS
Beginning of period 1,796,028,302 2,119,414,670
-------------- ----------------
End of period(a) $1,458,992,529 $1,796,028,302
-------------- ----------------
-------------- ----------------
(a) Includes undistributed net investment
income of $ 2,164,778 $ --
-------------- ----------------
</TABLE>
See Notes to Financial Statements
B-70
<PAGE>
Prudential Equity Income Fund
Notes to Financial Statements (Unaudited)
Prudential Equity Income Fund (the 'Fund') is registered under the
Investment Company Act of 1940 as a diversified, open-end, management investment
company. The investment objective of the Fund is both current income and capital
appreciation. It seeks to achieve this objective by investing primarily in
common stocks and convertible securities that provide investment income returns
above those of the Standard & Poor's 500 Composite Stock Price Index or the NYSE
Composite Index. The ability of the issuers of the debt securities held by the
Fund to meet their obligations may be affected by economic developments in a
specific industry or country.
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments in securities traded on a national
securities exchange (or reported on the Nasdaq national market) are valued at
the last sale price on such exchange on the day of valuation or, if there was no
sale on such day, the mean between the last bid and asked prices quoted on such
day or at the bid price in the absence of an asked price. Securities that are
actively traded in the over-the-counter market, including listed securities for
which the primary market is believed to be over-the-counter, are valued by an
independent pricing agent or principal market maker. Securities for which
reliable market quotations are not available or for which the pricing agent or
principal market maker does not provide a valuation or methodology or provides a
valuation or methodology that does not represent fair value, are valued in
accordance with procedures adopted by the Fund's Board of Trustees.
Short-term securities which mature in more than 60 days are valued based
upon current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost which approximates market value.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians under triparty repurchase
agreements, as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults and the value of
the collateral declines or if bankruptcy proceedings are commenced with respect
to the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
B-71
<PAGE>
Prudential Equity Income Fund
Notes to Financial Statements (Unaudited) Cont'd.
Foreign Currency Translation: The books and records of the Fund are
maintained in U.S. dollars. Foreign currency amounts are translated into U.S.
dollars on the following basis:
(i) market value of investment securities, other assets and
liabilities--at the current rates of exchange;
(ii) purchases and sales of investment securities, income and expenses--at
the rates of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange
rates and market values at the close of the period, the Fund does not isolate
that portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of long-term debt securities sold
during the period. Accordingly, such realized foreign currency gains and losses
are included in the reported net realized gains/losses on investment
transactions.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. companies
as a result of, among other factors, the possibility of political or economic
instability and the level of governmental supervision and regulation of foreign
securities markets.
Securities Transactions and Net Investment Income: Securities transactions
are recorded on the trade date. Realized gains and losses on sales of
investments are calculated on the identified cost basis. Dividend income is
recorded on the ex-dividend date, interest income is recorded on the accrual
basis. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares of the Fund
based upon the relative proportion of net assets of each class at the beginning
of the day.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in
accordance with the Fund's understanding of the applicable country's tax rates.
B-72
<PAGE>
Prudential Equity Income Fund
Notes to Financial Statements (Unaudited) Cont'd.
Dividends and Distributions: The Fund expects to pay dividends out of net
investment income quarterly and make distributions at least annually of any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatment of distributions from Real Estate Investment Trusts.
Securities Lending: The Fund may lend securities to broker-dealers. The
loans are secured by collateral at least equal at all times to the market value
of the securities loaned. Loans are subject to termination at the option of the
borrower or the Fund. Upon termination of the loan, the borrower will return to
the lender securities identical to the loaned securities. The Fund may bear the
risk of delay in recovery of, or even loss of rights in, the securities loaned
should the borrower of the securities fail financially. The Fund receives
compensation, net of any rebate, for lending its securities in the form of fees
or it retains a portion of interest on the investment of any cash received as
collateral. The Fund also continues to receive interest and dividends on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan. Prudential Securities
Incorporated ('PSI') is the securities lending agent for the Fund. For the six
months ended April 30, 2000, PSI has been compensated approximately $58,898 for
these services.
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. Pursuant to a subadvisory agreement between PIFM and The Prudential
Investment Corporation ('PIC'), PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the services of PIC,
the compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an
annual rate of .60 of 1% of the Fund's average daily net assets up to $500
million, .50 of 1% of the next $500 million, .475 of 1% of the next $500 million
and .45 of 1% of the average daily net assets in excess of $1.5 billion.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
Class B, Class C and Class Z shares. The Fund compensates PIMS for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution (the 'Class A, B and
B-73
<PAGE>
Prudential Equity Income Fund
Notes to Financial Statements (Unaudited) Cont'd.
C Plans'), regardless of expenses actually incurred. The distribution fees are
accrued daily and payable monthly. No distribution or service fees are paid to
PIMS as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, 1% and 1%,
of the average daily net assets of the Class A, B and C shares, respectively.
Such expenses under the Plans were .25 of 1%, 1% and 1% of the average daily net
assets of the Class A, B and C shares for the six months ended April 30, 2000,
respectively.
PIMS has advised the Fund that it has received approximately $119,700 and
$8,200 in front-end sales charges resulting from sales of Class A shares and
Class C shares, respectively, during the six months ended April 30, 2000. From
these fees, PIMS paid such sales charges to affiliated broker-dealers, which in
turn paid commissions to salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the six months ended April 30, 2000, it
received approximately $1,154,700 and $5,300 in contingent deferred sales
charges imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America ('Prudential').
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended April 30, 2000,
the Fund incurred fees of approximately $2,069,000 for the services of PMFS. As
of April 30, 2000, approximately $353,300 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
For the six months ended April 30, 2000, PSI, which is an indirect, wholly
owned subsidiary of Prudential, earned approximately $72,300 in brokerage
commissions from portfolio transactions executed on behalf of the Fund.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended April 30, 2000 were $388,483,624 and $738,226,111,
respectively.
The cost basis of investments for federal income tax purposes at April 30,
2000 was $1,454,210,250 and, accordingly, net unrealized appreciation for
federal income tax purposes was $43,174,642 (gross unrealized
appreciation--$285,406,645; gross unrealized depreciation--$242,232,003).
As of April 30, 2000, the Fund had securities on loan with an aggregate
market value of $42,668,495. The Fund received $44,874,500 in cash as collateral
for
B-74
<PAGE>
Prudential Equity Income Fund
Notes to Financial Statements (Unaudited) Cont'd.
securities on loan which was used to purchase highly liquid short-term
investments in accordance with the Fund's securities lending procedures.
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or Federal agency obligations. As of April 30, 2000, the Fund
had a .2% undivided interest in repurchase agreements in the joint account. The
undivided interest for the Fund represented $1,335,000 in principal amount. As
of such date, each repurchase agreement in the joint account and the value of
the collateral therefor were as follows:
ABN AMRO, Inc., 5.72%, in the principal amount of $160,000,000, repurchase
price $160,076,267, due 5/1/00. The value of the collateral including accrued
interest was $163,200,995.
Bear, Stearns & Co. Inc., 5.72%, in the principal amount of $160,000,000,
repurchase price $160,076,267, due 5/1/00. The value of the collateral including
accrued interest was $166,727,544.
Credit Suisse First Boston Corp., 5.75%, in the principal amount of
$160,000,000, repurchase price $160,076,667, due 5/1/00. The value of the
collateral including accrued interest was $165,506,481.
Morgan (J.P.) Securities Inc., 5.72%, in the principal amount of
$210,000,000, repurchase price $210,100,100, due 5/1/00. The value of the
collateral including accrued interest was $214,200,036.
Salomon Smith Barney, Inc., 5.65%, in the principal amount of
$162,577,000, repurchase price $162,653,547, due 5/1/00. The value of the
collateral including accrued interest was $165,893,849.
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are
sold with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value or Class Z shares. Class Z shares are not
B-75
<PAGE>
Prudential Equity Income Fund
Notes to Financial Statements (Unaudited) Cont'd.
subject to any sales or redemption charge and are offered exclusively for sale
to a limited group of investors.
The Fund has authorized an unlimited number of shares of beneficial
interest at $.01 par value divided into four classes, designated Class A, Class
B, Class C and Class Z.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
---------------------------------------------------------- ----------- -------------
<S> <C> <C>
Six months ended April 30, 2000:
Shares sold 8,565,255 $ 138,117,392
Shares issued in reinvestment of dividends and
distributions 4,484,388 71,939,128
Shares reacquired (15,976,936) (257,400,002)
----------- -------------
Net decrease in shares outstanding before conversion (2,927,293) (47,343,482)
Shares issued upon conversion from Class B 1,739,253 26,911,979
----------- -------------
Net decrease in shares outstanding (1,188,040) $ (20,431,503)
----------- -------------
----------- -------------
Year ended October 31, 1999:
Shares sold 16,694,821 $ 317,280,599
Shares issued in reinvestment of dividends and
distributions 2,467,403 44,364,034
Shares reacquired (22,063,847) (415,812,468)
----------- -------------
Net decrease in shares outstanding before conversion (2,901,623) (54,167,835)
Shares issued upon conversion from Class B 2,822,586 53,289,360
----------- -------------
Net decrease in shares outstanding (79,037) $ (878,475)
----------- -------------
----------- -------------
<CAPTION>
Class B
----------------------------------------------------------
<S> <C> <C>
Six months ended April 30, 2000:
Shares sold 2,124,720 $ 34,306,578
Shares issued in reinvestment of dividends and
distributions 7,102,787 113,650,862
Shares reacquired (16,366,675) (261,062,730)
----------- -------------
Net decrease in shares outstanding before conversion (7,139,168) (113,105,290)
Shares reacquired upon conversion into Class A (1,744,855) (26,911,979)
----------- -------------
Net decrease in shares outstanding (8,884,023) $(140,017,269)
----------- -------------
----------- -------------
Year ended October 31, 1999:
Shares sold 5,716,752 $ 108,733,754
Shares issued in reinvestment of dividends and
distributions 4,509,403 80,447,105
Shares reacquired (21,658,431) (404,250,026)
----------- -------------
Net decrease in shares outstanding before conversion (11,432,276) (215,069,167)
Shares reacquired upon conversion into Class A (2,833,175) (53,289,360)
----------- -------------
Net decrease in shares outstanding (14,265,451) $(268,358,527)
----------- -------------
----------- -------------
</TABLE>
B-76
<PAGE>
Prudential Equity Income Fund
Notes to Financial Statements (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class C Shares Amount
---------------------------------------------------------- ----------- -------------
Six months ended April 30, 2000:
<S> <C> <C>
Shares sold 296,665 $ 4,848,599
Shares issued in reinvestment of dividends and
distributions 248,043 3,968,908
Shares reacquired (802,133) (12,876,495)
----------- -------------
Net decrease in shares outstanding (257,425) $ (4,058,988)
----------- -------------
----------- -------------
Year ended October 31, 1999:
Shares sold 736,586 $ 14,065,037
Shares issued in reinvestment of dividends and
distributions 139,408 2,487,645
Shares reacquired (1,055,951) (19,790,850)
----------- -------------
Net decrease in shares outstanding (179,957) $ (3,238,168)
----------- -------------
----------- -------------
<CAPTION>
Class Z
----------------------------------------------------------
<S> <C> <C>
Six months ended April 30, 2000:
Shares sold 2,503,644 $ 40,338,727
Shares issued in reinvestment of dividends and
distributions 1,128,732 18,119,177
Shares reacquired (2,452,355) (39,184,158)
----------- -------------
Net increase in shares outstanding 1,180,021 $ 19,273,746
----------- -------------
----------- -------------
Year ended October 31, 1999:
Shares sold 2,860,602 $ 55,643,997
Shares issued in reinvestment of dividends and
distributions 607,453 10,942,674
Shares reacquired (3,605,044) (68,591,022)
----------- -------------
Net decrease in shares outstanding (136,989) $ (2,004,351)
----------- -------------
----------- -------------
</TABLE>
Note 7. Dividends
On June 27, 2000 the Board of Trustees of the Fund declared the following
dividends per share, payable on June 30, 2000 to shareholders of record on June
29, 2000.
<TABLE>
<CAPTION>
Class Class B Class
A and C Z
--------- --------- ---------
<S> <C> <C> <C>
Ordinary Income $ .09 $ .06 $ .10
</TABLE>
Note 8. Borrowings
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility.
The Fund utilized the line of credit during the six months ended April 30,
2000. The average daily balance the Fund had outstanding during the period was
approximately $6,027,786 at a weighted average interest rate of approximately
6.21%.
B-77
<PAGE>
Prudential Equity Income Fund
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Class A
----------------
Six Months Ended
April 30, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 18.12
----------------
Income from investment operations
Net investment income .19
Net realized and unrealized gain (loss) on investment
transactions .24
----------------
Total from investment operations .43
----------------
Less distributions
Dividends from net investment income (.16)
Dividends in excess of net investment income --
Distributions from net realized gains (2.18)
----------------
Total distributions (2.34)
----------------
Net asset value, end of period $ 16.21
----------------
----------------
TOTAL RETURN(a): 2.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $535,090
Average net assets (000) $570,387
Ratios to average net assets:
Expenses, including distribution fees 1.14%(b)
Expenses, excluding distribution fees .89%(b)
Net investment income 2.20%(b)
Portfolio turnover rate 24%
</TABLE>
------------------------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(b) Annualized.
See Notes to Financial Statements
B-78
<PAGE>
Prudential Equity Income Fund
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------------------------------------------------
Year Ended October 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 18.63 $ 21.00 $ 15.43 $ 14.40 $ 14.03
---------------- ---------------- ---------------- ---------------- ----------------
.33 .45 .45 .47 .48
.58 (.49) 6.29 1.75 .95
---------------- ---------------- ---------------- ---------------- ----------------
.91 (.04) 6.74 2.22 1.43
---------------- ---------------- ---------------- ---------------- ----------------
(.33) (.44) (.43) (.49) (.54)
(.03) -- -- -- --
(1.06) (1.89) (.74) (.70) (.52)
---------------- ---------------- ---------------- ---------------- ----------------
(1.42) (2.33) (1.17) (1.19) (1.06)
---------------- ---------------- ---------------- ---------------- ----------------
$ 18.12 $ 18.63 $ 21.00 $ 15.43 $ 14.40
---------------- ---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ---------------- ----------------
5.03% (.65)% 45.68% 15.97% 11.15%
$619,469 $638,547 $570,146 $341,717 $276,990
$653,798 $655,776 $454,892 $310,335 $236,688
1.02% .91% .94% .98% 1.03%
.77% .66% .69% .73% .78%
1.71% 2.19% 2.32% 3.26% 3.36%
17% 22% 36% 36% 74%
</TABLE>
See Notes to Financial Statements
B-79
<PAGE>
Prudential Equity Income Fund
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class B
----------------
Six Months Ended
April 30, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 18.06
----------------
Income from investment operations
Net investment income .13
Net realized and unrealized gain (loss) on investment
transactions .24
----------------
Total from investment operations .37
----------------
Less distributions
Dividends from net investment income (.10)
Dividends in excess of net investment income --
Distributions from net realized gains (2.18)
----------------
Total distributions (2.28)
----------------
Net asset value, end of year $ 16.15
----------------
----------------
TOTAL RETURN(a): 2.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $756,586
Average net assets (000) $866,405
Ratios to average net assets:
Expenses, including distribution fees 1.89%(b)
Expenses, excluding distribution fees .89%(b)
Net investment income 1.45%(b)
Portfolio turnover rate 24%
</TABLE>
------------------------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(b) Annualized.
See Notes to Financial Statements
B-80
<PAGE>
Prudential Equity Income Fund
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------------------------------------------------
Year Ended October 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 18.57 $ 20.93 $ 15.39 $ 14.36 $ 14.00
---------------- ---------------- ---------------- ---------------- ----------------
.19 .29 .29 .39 .37
.58 (.48) 6.29 1.71 .95
---------------- ---------------- ---------------- ---------------- ----------------
.77 (.19) 6.58 2.10 1.32
---------------- ---------------- ---------------- ---------------- ----------------
(.19) (.28) (.30) (.37) (.44)
(.03) -- -- -- --
(1.06) (1.89) (.74) (.70) (.52)
---------------- ---------------- ---------------- ---------------- ----------------
(1.28) (2.17) (1.04) (1.07) (.96)
---------------- ---------------- ---------------- ---------------- ----------------
$ 18.06 $ 18.57 $ 20.93 $ 15.39 $ 14.36
---------------- ---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ---------------- ----------------
4.25% (1.35)% 44.60% 15.12% 10.29%
$1,006,346 $1,299,962 $1,250,216 $929,948 $906,793
$1,200,663 $1,391,826 $1,072,118 $951,220 $911,856
1.77% 1.66% 1.69% 1.73% 1.78%
.77% .66% .69% .73% .78%
.98% 1.44% 1.60% 2.51% 2.66%
17% 22% 36% 36% 74%
</TABLE>
See Notes to Financial Statements
B-81
<PAGE>
Prudential Equity Income Fund
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class C
<S> <C> <C>
----------------
<CAPTION>
Six Months Ended
April 30, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 18.06
--------
Income from investment operations
Net investment income .12
Net realized and unrealized gain (loss) on investment
transactions .25
--------
Total from investment operations .37
--------
Less distributions
Dividends from net investment income (.10)
Dividends in excess of net investment income --
Distributions from net realized gains (2.18)
--------
Total distributions (2.28)
--------
Net asset value, end of period $ 16.15
--------
--------
TOTAL RETURN(a): 2.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 25,969
Average net assets (000) $ 29,329
Ratios to average net assets:
Expenses, including distribution fees 1.89%(b)
Expenses, excluding distribution fees .89%(b)
Net investment income 1.45%(b)
Portfolio turnover rate 24%
</TABLE>
------------------------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(b) Annualized.
See Notes to Financial Statements
B-82
<PAGE>
Prudential Equity Income Fund
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class C
----------------------------------------------------------------------------------------------------------
Year Ended October 31,
----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 18.57 $ 20.93 $ 15.39 $14.36 $14.00
-------- -------- -------- ------- -------
.19 .30 .37 .38 .40
.58 (.49) 6.21 1.72 .92
-------- -------- -------- ------- -------
.77 (.19) 6.58 2.10 1.32
-------- -------- -------- ------- -------
(.19) (.28) (.30) (.37) (.44)
(.03) -- -- -- --
(1.06) (1.89) (.74) (.70) (.52)
-------- -------- -------- ------- -------
(1.28) (2.17) (1.04) (1.07) (.96)
-------- -------- -------- ------- -------
$ 18.06 $ 18.57 $ 20.93 $15.39 $14.36
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
4.25% (1.35)% 44.60% 15.12% 10.29%
$ 33,685 $ 37,988 $ 17,911 $8,511 $4,586
$ 36,981 $ 31,345 $ 11,432 $6,730 $3,132
1.77% 1.66% 1.69% 1.73% 1.78%
.77% .66% .69% .73% .78%
.98% 1.47% 1.53% 2.51% 2.57%
17% 22% 36% 36% 74%
</TABLE>
See Notes to Financial Statements
B-83
<PAGE>
Prudential Equity Income Fund
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class Z
----------------
Six Months Ended
April 30, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 18.13
----------------
Income from investment operations
Net investment income .20
Net realized and unrealized gain (loss) on investment
transactions .26
----------------
Total from investment operations .46
----------------
Less distributions
Dividends from net investment income (.18)
Dividends in excess of net investment income --
Distributions from net realized gains (2.18)
----------------
Total distributions (2.36)
----------------
Net asset value, end of period $ 16.23
----------------
----------------
TOTAL RETURN(a): 2.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $141,347
Average net assets (000) $136,597
Ratios to average net assets:
Expenses, including distribution fees .89%(b)
Expenses, excluding distribution fees .89%(b)
Net investment income 2.45%(b)
Portfolio turnover rate 24%
</TABLE>
------------------------------
(a) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(b) Annualized.
(c) Commencement of offering of Class Z shares.
See Notes to Financial Statements
B-84
<PAGE>
Prudential Equity Income Fund
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class Z
----------------------------------------------------------------------------------------
Year Ended October 31, March 1, 1996(c)
---------------------------------------------------------- Through
1999 1998 1997 October 31,1996
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 18.64 $ 21.00 $ 15.42 $ 15.13
---------------- ---------------- ---------------- ----------
.38 .52 .36 .38
.58 (.51) 6.43 .30
---------------- ---------------- ---------------- ----------
.96 .01 6.79 .68
---------------- ---------------- ---------------- ----------
(.38) (.48) (.47) (.39)
(.03) -- -- --
(1.06) (1.89) (.74) --
---------------- ---------------- ---------------- ----------
(1.47) (2.37) (1.21) (.39)
---------------- ---------------- ---------------- ----------
$ 18.13 $ 18.64 $ 21.00 $ 15.42
---------------- ---------------- ---------------- ----------
---------------- ---------------- ---------------- ----------
5.28% (.40)% 46.12% 4.55%
$136,529 $142,918 $ 74,956 $ 44,509
$144,747 $103,474 $ 57,369 $ 24,641
.77% .66% .69% .73%(b)
.77% .66% .69% .73%(b)
1.97% 2.49% 2.58% 3.51%(b)
17% 22% 36% 36%
</TABLE>
See Notes to Financial Statements
B-85
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than the Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obliqations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
. Leading market positions in well-established industries.
. High rates of return on funds employed.
. Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
. Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
. Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This normally
will be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and
A-1
<PAGE>
coverage ratios, while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
Debt Ratings
AAA: An obligation rated AAA has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated AA differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated BBB exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB, B, CCC and CC: Obligations rated BB, B, CCC and CC are regarded as
having significant speculative characteristics. BB indicates the least degree
of speculation and CC the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
Commercial Paper Ratings
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
DUFF & PHELPS CREDIT RATING CO.
Long-Term Debt and Preferred Stock Ratings
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary sightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
A-2
<PAGE>
B+, B, B-: Below investment grade and possessing risk that obligations will
not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or
into a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty exists
as to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
Short-Term Debt Ratings
D-1 +: Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of funds, is
outstanding, and safety is just below risk-free U.S. Treasury short-term
obligations.
D-1: Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are minor.
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are very small.
D-2: Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
FITCH IBCA, INC.
Long-Term Ratings
AAA Highest credit quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA Very high credit quality. "AA" ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. "A" ratings denote a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to change in circumstances
or in economic conditions than is the case for higher ratings.
BBB Good credit quality. "BBB" ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and
in economic conditions are more likely to impair this capacity. This is the
lowest investment-grade category.
BB Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent
upon a sustained, favorable business and economic environment.
CCC, CC High default risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of
some kind appears probable.
A-3
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
Asset Allocation
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns,
while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
Diversification
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable
returns. Owning a portfolio of securities mitigates the individual risks (and
returns) of any one security. Additionally, diversification among types of
securities reduces the risks (and general returns) of any one type of
security.
Duration
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to
changes in interest rates. When interest rates fall, bond prices generally
rise. Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, i.e., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of
interest rate changes on the bond's (or the bond portfolio's) price. Duration
differs from effective maturity in that duration takes into account call
provisions, coupon rates and other factors. Duration measures interest rate
risk only and not other risks, such as credit risk and, in the case of non-
U.S. dollar denominated securities, currency risk. Effective maturity measures
the final maturity dates of a bond (or a bond portfolio).
Market Timing
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will
fluctuate. However, owning a security for a long period of time may help
investors offset short-term price volatility and realize positive returns.
Power of Compounding
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth
of assets. The long-term investment results of compounding may be greater than
that of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
Standard Deviation
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential.
Standard deviation is only one of several measures of a fund's volatility.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
The following chart shows the long-term performance of various asset classes
and the rate of inflation.
Historical Performance Data
[GRAPH]
Small Stocks $6,640.79
Common Stocks $2,845.63
Long-Term Bonds $ 40.22
Treasury Bills $ 15.64
Inflation $ 9.40
Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential mutual
fund.
Generally, stock returns are due to capital appreciation and the reinvestment
of any gains. Bond returns are due to reinvesting interest. Also, stock prices
usually are more volatile than bond prices over the long-term. Small stock
returns for 1926-1980 are those of stocks comprising the 5th quintile of the
New York Stock Exchange. Thereafter, returns are those of the Dimensional Fund
Advisors (DFA) Small Company Fund. Common stock returns are based on the S&P
500 Composite Stock Price Index, a market-weighted, unmanaged index 500 stocks
(currently) in a variety of industries. It is often used as a broad measure of
stock market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate
bonds, U.S. high yield bonds and world government bonds on an annual basis
from 1989 through 1999. The total returns of the indices include accrued
interest, plus the price changes (gains or losses) of the underlying
securities during the period mentioned. The data is provided to illustrate the
varying historical total returns and investors should not consider this
performance data as an indication of the future performance of the Fund or of
any sector in which the Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information
has not been verified. The figures do not reflect the operating expenses and
fees of a mutual fund. See "Risk/Return Summary-Fees and Expenses" in the
prospectus. The net effect of the deduction of the operating expenses of a
mutual fund on these historical total returns, including the compounded effect
over time, could be substantial.
[CHART]
Historical Total Returns of Different Bond Market Sectors
------------------------------------------------------------------------------
-
YEAR 1989 1990 1991 1992 1993 1994 1995
------------------------------------------------------------------------------
-
U.S. Government
Treasury
Bonds/1/ 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4%
------------------------------------------------------------------------------
-
U.S. Government
Mortgage
Securities/2/ 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8%
------------------------------------------------------------------------------
-
U.S. Investment Grade
Corporate Bonds/3/ 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3%
------------------------------------------------------------------------------
-
U.S. High Yield
Bonds/4/ 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2%
------------------------------------------------------------------------------
-
World Government
Bonds/5/ (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6%
===============================================================================
Difference between
highest and lowest 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5%
returns percent
------------------------------------------------------------------------------
-
-----------------------------------------------------------
YEAR 1996 1997 1998 1999
-----------------------------------------------------------
U.S. Government
Treasury
Bonds/1/ 2.7% 9.8% 10.0% -2.56%
-----------------------------------------------------------
U.S. Government
Mortgage
Securities/2/ 5.4% 9.5% 7.0% 1.86%
-----------------------------------------------------------
U.S. Investment Grade
Corporate Bonds/3/ 3.3% 10.2% 8.6% -1.96%
-----------------------------------------------------------
U.S. High Yield
Bonds/4/ 11.4% 12.8% 1.6% 2.39%
-----------------------------------------------------------
World Government
Bonds/5/ 4.1% (4.3)% 5.3% -5.07%
===========================================================
Difference between
highest and lowest 8.7% 17.1% 8.4% 7.46%
returns percent
-----------------------------------------------------------
----------
/1/Lehman Brothers Treasury Bond Index is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one
year.
/2/Lehman Brothers Mortgage-Backed Securities Index is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of
the Government National Mortgage Association (GNMA), Federal National
Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation
(FHLMC).
/3/Lehman Brothers Corporate Bond Index includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign
governments, municipalities, governmental agencies or international
agencies. All bonds in the index have maturities of at least one year.
Source: Lipper Inc.
/4/Lehman Brothers High Yield Bond Index is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or
Fitch Investors Service). All bonds in the index have maturities of at least
one year.
/5/Salomon Smith Barney World Government Index (Non U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in
the U.S., but including those in Japan, Germany, France, the U.K., Canada,
Italy, Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and
Austria. All bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart illustrates the
performance of major world stock
markets for the period from December
31, 1985 through December 31, 1999.
It does not represent the
performance of any Prudential mutual
fund.
[GRAPH]
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
U.K. 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
Source: Morgan Stanley Capital
International (MSCI) and Lipper Inc.
as of 12/31/99. Used with
permission. Morgan Stanley Country
indices are unmanaged indices which
include those stocks making up the
largest two-thirds of each country's
total stock market capitalization.
Returns reflect the reinvestment of
all distributions. This chart is for
illustrative purposes only and is
not indicative of the past, present
or future performance of any
specific investment. Investors
cannot invest directly in stock
indexes.
This chart shows the growth of a
hypothetical $10,000 investment made
in the stocks representing the S&P
500 stock index with and without
reinvested dividends.
[GRAPH]
Capital Appreciation and
Reinvesting Dividends........$474,094
Capital Appreciation only.....$159,597
Source: Lipper Inc. Used with
permission. All rights reserved.
This chart is used for illustrative
purposes only and is not intended to
represent the past, present or
future performance of any Prudential
mutual fund. Common stock total
return is based on the Standard &
Poor's 500 Stock Index, a market-
value-weighted index made up of 500
of the largest stocks in the U.S.
based upon their stock market value.
Investors cannot invest directly in
indexes.
II-3
<PAGE>
------------------------------------------
World Stock Market
Capitalization by Region
World Total: $20.7 Trillion
Canada - 2.1%
U.S. - 49%
Europe - 32.5%
Pacific Basin - 16.4%
Source: Morgan Stanley Capital
International, December 31, 1999. Used
with permission. This chart represents
the capitalization of major world stock
markets as measured by the Morgan
Stanley Capital International (MSCI)
World Index. The total market
capitalization is based on the value of
approximately 1577 companies in 22
countries (representing approximately
60% of the aggregate market value of
the stock exchanges). This chart is for
illustrative purposes only and does not
represent the allocation of any
Prudential Mutual Fund.
II-4
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
[GRAPH]
------------------------------------------
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond
from 1926-1999. Yields represent that of an annually renewed one-bond
portfolio with a remaining maturity of approximately 20 years. This chart is
for illustrative purposes and should not be construed to represent the yields
of any Prudential mutual fund.
II-5
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits.
(a) (1) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on
December 21, 1994 (File No. 33-9269).
(2) Amended Certificate of Designation. Incorporated by reference to
Exhibit (a)(2) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A filed via EDGAR on October 22,
1998 (File No. 33-9269).
(b) Amended By-laws.*
(c) (1) Specimen receipt for shares of beneficial interest, $.01 par
value. Incorporated by reference to Exhibit 4(a) to Post-Effective
Amendment No. 18 to the Registration Statement on Form N-1A filed
via EDGAR on December 30, 1997 (File No. 33-9269).
(2) Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed via EDGAR on December 30,
1993 (File No. 33-9269).
(d) (1) Amended and Restated Management Agreement between the
Registrant and Prudential Mutual Fund Management, Inc.
Incorporated by reference to Exhibit 5(a) to Post Effective
Amendment No. 15 to the Registration Statement on Form N-1A filed
via EDGAR on October 30, 1995 (File No. 33-9269).
(2) Amended and Restated Subadvisory Agreement between Prudential
Investments Fund Management LLC and The Prudential Investment
Corporation. Incorporated by reference to Exhibit (d)(2) to Post-
Effective Amendment No. 21 to the Registration Statement on Form N-
1A filed via EDGAR on January 20, 2000 (File No. 33-9269).
(e) (1) Distribution Agreement with Prudential Investment Management
Services LLC. Incorporated by reference to Exhibit (e)(1) to Post-
Effective Amendment No. 19 to the Registration Statement on Form
N-1A filed via EDGAR on October 22, 1998 (File No. 33-9269).
(2) Selected Dealer Agreement. Incorporated by reference to Exhibit
(e)(2) to Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A filed via EDGAR on October 22, 1998 (File No.
33-9269).
(g) (1) Custodian Contract between the Registrant and State Street
Bank and Trust Company. Incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 18 to the Registration Statement on
Form N-1A filed via EDGAR on December 30, 1997 (File No. 33-9269).
(2) Amendment to Custodian Contract. Incorporated by reference to
Exhibit (g)(2) to Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A filed via EDGAR on January 20,
2000 (File No. 33-9269).
(h) (1) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc. Incorporated by
reference to Exhibit 9 to Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A filed via EDGAR on December
30, 1997 (File No. 33-9269).
(2) Amendment to Transfer Agency Agreement. Incorporated by
reference to Exhibit (h)(2) to Post-Effective Amendment No. 21 to
the Registration Statement on Form N-1A filed via EDGAR on January
20, 2000 (File No. 33-9269).
(i) (1) Opinion and consent of Counsel. Incorporated by reference to
Exhibit (i) to Post-Effective Amendment No. 21 to the Registration
Statement on Form N-1A filed via EDGAR on January 20, 2000 (File
No. 33-9269).
(2) Consent of Counsel.*
C-1
<PAGE>
(j) Consent of independent accountants.*
(m) (1) Amended and Restated Distribution and Service Plan for Class A
shares. Incorporated by reference to Exhibit (m)(1) to Post-
Effective Amendment No. 19 to the Registration Statement on Form
N-1A filed via EDGAR on October 22, 1998 (File No. 33-9269).
(2) Amended and Restated Distribution and Service Plan for Class B
shares. Incorporated by reference to Exhibit (m)(2) to Post-
Effective Amendment No. 19 to the Registration Statement on Form N-
1A filed via EDGAR on October 22, 1998 (File No. 33-9269).
(3) Amended and Restated Distribution and Service Plan for Class C
shares. Incorporated by reference to Exhibit (m)(3) to Post-
Effective Amendment No. 19 to the Registration Statement on Form N-
1A filed via EDGAR on October 22, 1998 (File No. 33-9269).
(n) Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit (o)
to Post-Effective Amendment No. 19 to the Registration Statement
on Form N-1A filed via EDGAR on October 22, 1998 (File No. 33-
9269).
(p) (1) Fund's Code of Ethics.*
(2) Manager's, Subadviser's and Distributor's Code of Ethics.*
----------
*Filed herewith.
Item 24. Persons Controlled by or under Common Control with Registrant.
None.
Item 25. Indemnification.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article V, Sections 5.2 and 5.3 of the
Declaration of Trust (Exhibit a(1) to the Registration Statement) and to
Article X of the Fund's By-Laws (Exhibit b to the Registration Statement),
officers, Trustees, employees and agents of the Registrant will not be liable
to the Registrant, any shareholder, officer, Trustee, employee, agent or other
person for any action or failure to act, except for bad faith, willful
misfeasance, gross negligence or reckless disregard of duties, and those
individuals may be indemnified against liabilities in connection with the
Registrant, subject to the same exceptions. As permitted by Section 17(i) of
the 1940 Act, pursuant to Section 10 of the Distribution Agreement (Exhibit e
to the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful misfeasance or reckless disregard of
duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to Trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the 1940 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a Trustee,
officer, or controlling person of the Registrant in connection with the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such Trustee, officer or controlling person in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the 1940 Act and will be governed
by the final adjudication of such issue.
The Registrant maintains an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against
such officers and Trustees, to the extent such officers and Trustees are not
found to have committed conduct constituting willful misfeasance, bad faith,
gross negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of
indemnification payments to officers and Trustees under certain circumstances.
C-2
<PAGE>
Section 9 of the Management Agreement (Exhibit d(1) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit d(2) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from
reckless disregard by them of their respective obligations and duties under
the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner
consistent with Release No. 11330 of the Securities and Exchange Commission
under the 1940 Act so long as the interpretation of Section 17(h) and 17(i) of
such Act remain in effect and are consistently applied.
Item 26. Business and Other Connections of Investment Adviser.
(a) Prudential Investments Fund Management LLC
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Investment Advisory and Other Services" in
the Statement of Additional Information constituting Part B of this
Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark,
NJ 07102-4077.
<TABLE>
<CAPTION>
Name and Address Position with PIFM Principal Occupations
---------------- ------------------ ---------------------
<C> <S> <C>
David R. Odenath, Jr. Officer in Charge, Officer in Charge, President, Chief Executive Officer
President, Chief and Chief Operating Officer, PIFM; Senior Vice
Executive Officer President, The Prudential Insurance Company of
and Chief Operating America (Prudential)
Officer
Robert F. Gunia Executive Vice Executive Vice President and Chief Administrative
President and Chief Officer, PIFM; Vice President, Prudential; President,
Administrative Prudential Investment Management Services LLC (PIMS)
Officer
William V. Healey Executive Vice Executive Vice President, Chief Legal Officer and
President, Chief Secretary, PIFM; Vice President and Associate General
Legal Officer and Counsel, Prudential; Senior Vice President, Chief
Secretary Legal Officer and Secretary, PIMS
Stephen Pelletier Executive Vice Executive Vice President, PIFM
President
Judy A. Rice Executive Vice Executive Vice President, PIFM
President
Lynn M. Waldvogel Executive Vice Executive Vice President, PIFM
President
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Investment Adviser" in the Prospectus
constituting Part A of this Registration Statement and "Investment Advisory
and Other Services" in the Statement of Additional Information constituting
Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
C-3
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with PIC Principal Occupations
---------------- ----------------- ---------------------
<S> <C> <C>
John R. Strangfeld Chairman of the Board, President of Prudential Global Asset Management Group of
President, Chief Executive Prudential; Senior Vice President, Prudential; Chairman of
Officer and Director the Board, President, Chief Executive Officer and Director,
PIC
Bernard Winograd Senior Vice President and Chief Executive Officer, Prudential Real Estate Investors;
Director Senior Vice President and Director, PIC
</TABLE>
Item 27. Principal Underwriters.
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation Trust, Command Government Fund,
Command Money Fund, Command Tax-Free Fund, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Diversified Bond Fund, Inc., Prudential Diversified Funds, Prudential Emerging
Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income
Fund, Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund,
Inc., Prudential Global Total Return Fund, Inc., Prudential Government Income
Fund, Inc., Prudential Government Securities Trust, Prudential High Yield
Fund, Inc., Prudential High Yield Total Return Fund, Inc., Prudential Index
Series Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential
International Bond Fund, Inc., Prudential MoneyMart Assets, Inc., Prudential
Municipal Bond Fund, Prudential Municipal Series Fund, Prudential National
Municipals Fund, Inc., Prudential Natural Resources Fund, Inc., Prudential
Pacific Growth Fund, Inc., Prudential Real Estate Securities Fund, Prudential
Sector Funds, Inc., Prudential Small Company Fund, Inc., Prudential Special
Money Market Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential
20/20 Focus Fund, Prudential Tax-Free Money Fund, Inc., Prudential Tax-Managed
Funds, Prudential Tax-Managed Small-Cap Fund, Inc., Prudential World Fund,
Inc., Strategic Partners Series, Target Funds, The Prudential Investment
Portfolios, Inc. and The Target Portfolio Trust.
PIMS is also distributor of the following unit investment trusts: Separate
Accounts: Prudential's Gibraltar Fund, Inc., The Prudential Variable Contract
Account-2, The Prudential Variable Contract Account-10, The Prudential
Variable Contract Account-11, The Prudential Variable Contract Account-24, The
Prudential Contract Account GI-2, The Prudential Discovery Select Group
Variable Contract Account, The Pruco Life Flexible Premium Variable Annuity
Account, The Pruco Life of New Jersey Flexible Premium Variable Annuity
Account, The Prudential Individual Variable Contract Account and The
Prudential Qualified Individual Variable Contract Account.
(b) Information concerning the directors and officers of PIMS is set forth
below.
<TABLE>
<CAPTION>
Positions and Positions and
Offices with Offices with
Name(1) Underwriter Registrant
------- ------------- -------------
<S> <C> <C>
Margaret Deverell......... Vice President and Chief None
Financial Officer
Robert F. Gunia........... President Vice President and Trustee
Kevin Frawley............. Senior Vice President and None
Compliance Officer
213 Washington Street
Newark, NJ 07102
William V. Healey......... Senior Vice President, Secretary Assistant Secretary
and Chief Legal Officer
John R. Strangfeld........ Advisory Board Member President and Trustee
</TABLE>
----------
(/1/)The address of each person named is Prudential Plaza, 751 Broad Street,
Newark, New Jersey 07102 unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
Item 28. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices
of State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts
C-4
<PAGE>
02171; The Prudential Investment Corporation, Prudential Plaza, 745 Broad
Street, Newark, New Jersey 07102; the Registrant, Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077; and Prudential Mutual Fund
Services LLC, 194 Wood Avenue South, Iselin, New Jersey 08830. Documents
required by Rules 31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) and
Rules 31a-1(b)(4) and (11) and 31a-1(d) will be kept at Gateway Center Three,
100 Mulberry Street, Newark, New Jersey 07102-4077, and the remaining
accounts, books and other documents required by such other pertinent
provisions of Section 31(a) and the Rules promulgated thereunder will be kept
by State Street Bank and Trust Company and Prudential Mutual Fund Services
LLC.
Item 29. Management Services.
Other than as set forth under the captions "How the Fund is Managed--
Manager," "How the Fund is Managed--Investment Adviser" and "How the Fund is
Managed--Distributor" in the Prospectus and the caption "Investment Advisory
and Other Services" in the Statement of Additional Information, constituting
Parts A and B, respectively, of this Post-Effective Amendment to the
Registration Statement, Registrant is not a party to any management-related
service contract.
Item 30. Undertakings.
Not applicable.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Fund has duly caused this Post-Effective Amendment to the
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Newark, and State of New Jersey, on the 19th day of
July, 2000.
PRUDENTIAL EQUITY INCOME FUND
/s/ John R. Strangfeld
-----------------------------------
(John R. Strangfeld, President)
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Grace C. Torres Treasurer and Principal Financial July 19, 2000
--------------------------------- and Accounting Officer
Grace C. Torres
/s/ Delayne D. Gold Trustee July 19, 2000
---------------------------------
Delayne D. Gold
/s/ Robert F. Gunia Trustee July 19, 2000
---------------------------------
Robert F. Gunia
/s/ Douglas H. McCorkindale Trustee July 19, 2000
---------------------------------
Douglas H. McCorkindale
/s/ Thomas T. Mooney Trustee July 19, 2000
---------------------------------
Thomas T. Mooney
/s/ Stephen P. Munn Trustee July 19, 2000
---------------------------------
Stephen P. Munn
/s/ David R. Odenath, Jr. Trustee July 19, 2000
---------------------------------
David R. Odenath, Jr.
/s/ Richard A. Redeker Trustee July 19, 2000
---------------------------------
Richard A. Redeker
/s/ Robin B. Smith Trustee July 19, 2000
---------------------------------
Robin B. Smith
/s/ John R. Strangfeld President and Trustee July 19, 2000
---------------------------------
John R. Strangfeld
/s/ Louis A. Weil, III Trustee July 19, 2000
---------------------------------
Louis A. Weil, III
/s/ Clay T. Whitehead Trustee July 19, 2000
---------------------------------
Clay T. Whitehead
</TABLE>
C-6
<PAGE>
PRUDENTIAL EQUITY INCOME FUND
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
(a)(1) Amended and Restated Declaration of Trust. Incorporated by
reference to Exhibit 1(a) to Post-Effective Amendment No. 13 to
the Registration Statement on Form N-1A filed via EDGAR on
December 21, 1994 (File No. 33-9269).
(a)(2) Amended Certificate of Designation. Incorporated by reference
to Exhibit (a)(2) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A filed via EDGAR on October
22, 1998 (File No. 33-9269).
(b) Amended By-laws.*
(c)(1) Specimen receipt for shares of beneficial interest, $.01 par
value. Incorporated by reference to Exhibit 4(a) to Post-
Effective Amendment No. 18 to the Registration Statement on
Form N-1A filed via EDGAR on December 30, 1997 (File No. 33-
9269).
(c)(2) Instruments Defining Rights of Shareholders. Incorporated by
reference to Exhibit 4(c) to Post-Effective Amendment No. 10 to
the Registration Statement on Form N-1A filed via EDGAR on
December 30, 1993 (File No. 33-9269).
(d)(1) Amended and Restated Management Agreement between the
Registrant and Prudential Mutual Fund Management, Inc.
Incorporated by reference to Exhibit 5(a) to Post-Effective
Amendment No. 15 to the Registration Statement on Form N-1A
filed via EDGAR on October 30, 1995 (File No. 33-9269).
(d)(2) Amended and Restated Subadvisory Agreement between Prudential
Investments Fund Management LLC and The Prudential Investment
Corporation. Incorporated by reference to Exhibit (d)(2) to
Post-Effective Amendment No. 21 to the Registration Statement
on Form N-1A filed via EDGAR on January 20, 2000 (File No. 33-
9269).
(e)(1) Distribution Agreement with Prudential Investment Management
Services LLC. Incorporated by reference to Exhibit (e)(1) to
Post-Effective Amendment No. 19 to the Registration Statement
on Form N-1A filed via EDGAR on October 22, 1998 (File No. 33-
9269).
(e)(2) Selected Dealer Agreement. Incorporated by reference to Exhibit
(e)(2) to Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A filed via EDGAR on October 22, 1998
(File No. 33-9269).
(g)(1) Custodian Contract between the Registrant and State Street Bank
and Trust Company. Incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 18 to the Registration Statement
on Form N-1A filed via EDGAR on December 30, 1997 (File No. 33-
9269).
(g)(2) Amendment to Custodian Contract. Incorporated by reference to
Exhibit (g)(2) to Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A filed via EDGAR on January
20, 2000 (File No. 33-9269).
(h)(1) Transfer Agency and Service Agreement between the Registrant
and Prudential Mutual Fund Services, Inc. Incorporated by
reference to Exhibit 9 to Post-Effective Amendment No. 18 to
the Registration Statement on Form N-1A filed via EDGAR on
December 30, 1997 (File No. 33-9269).
(h)(2) Amendment to Transfer Agency Agreement. Incorporated by
reference to Exhibit (h)(2) to Post-Effective Amendment No. 21
to the Registration Statement on Form N-1A filed via EDGAR on
January 20, 2000 (File No. 33-9269).
(i)(1) Opinion and consent of Counsel. Incorporated by reference to
Exhibit (i) to Post-Effective Amendment No. 21 to the
Registration Statement on Form N-1A filed via EDGAR on January
20, 2000 (File No. 33-9269).
(i)(2) Consent of Counsel.*
(j) Consent of independent accountants.*
(m)(1) Amended and Restated Distribution and Service Plan for Class A
shares. Incorporated by reference to Exhibit (m)(1) to Post-
Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on October 22, 1998 (File No. 33-
9269).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
(m)(2) Amended and Restated Distribution and Service Plan for Class B
shares. Incorporated by reference to Exhibit (m)(2) to Post-
Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on October 22, 1998 (File No. 33-
9269).
(m)(3) Amended and Restated Distribution and Service Plan for Class C
shares. Incorporated by reference to Exhibit (m)(3) to Post-
Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed via EDGAR on October 22, 1998 (File No. 33-
9269).
(n) Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit
(0) to Post-Effective Amendment No. 19 to the Registration
Statement on Form N-1A filed via EDGAR on October 22, 1998
(File No. 33-9269).
(p)(1) Fund's Code of Ethics.*
(p)(2) Manager's, Subadviser's and Distributor's Code of Ethics.*
</TABLE>
----------
*Filed herewith.
